Last Voting Date: May 31, 1994
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Executive Summary
The NASD invites members to vote on proposed amendments to Article III of the NASD By-Laws and to Part I of Schedule C to the By-Laws to require that initial application for NASD membership be reviewed by a Subcommittee designated by the District Committee, with right of appeal to the full District Committee and the National Business Conduct Committee (NBCC). The text of the proposed amendment follows this Notice.
Background And Description Of Amendments
Sections 1(b) and 1(c) to Article III of the NASD By-Laws currently provide that any application for membership in the NASD be referred to the District Committee of the NASD district in which the applicant has its principal place of business. Such District Committee makes the determination as to whether the applicant satisfies or fails to satisfy all of the admission requirements of the NASD By-Laws. However, the provisions governing pre-membership interviews in Schedule C of the NASD By-Laws currently contemplate a possible three-step process under which the initial determination for NASD eligibility is made by District Office staff with review, if appropriate, by the District Committee upon request by the applicant.
Although the provisions of Schedule C contemplate review of applications for NASD membership by the District Office staff, no district, in fact, has ever made such a determination at a staff level. Additionally, such action would be inconsistent with the governing By-Law provision that requires the District Committee to make an initial determination. The NASD is, therefore, proposing to amend Article III and Schedule C of the NASD By-Laws to modify and make consistent the process by which an applicant applies for NASD membership by requiring that all initial applications for membership be reviewed by either the District Committee or a Subcommittee of the District Committee, with a right of appeal to the full District Committee.
Description Of Amendments
BY-LAWS
Subsection 1(b) and 1(c) to Article III of the NASD By-Laws are proposed to be amended to establish the authority of a District Committee to designate a Subcommittee to make a determination of admissibility of an applicant and to require a designated Subcommittee to promptly notify the NASD Membership Department of its determination. The phrase "a majority of the members of is proposed to be eliminated from Subsection 1(b) as unnecessary.
SCHEDULE C
As an initial matter, Schedule C is proposed to be amended throughout by inserting the phrase "a Subcommittee designated by the District Committee" in place of "District Committee" or "District Office" wherever the latter phrases appear. Such replacement conforms the language of Schedule C to the proposed amendment by establishing the ability of the District Committee to delegate authority to a Subcommittee to review and determine the admissibility of an applicant.
Subsection (1)(a) to Part I of Schedule C is proposed to be amended to clarify that applications for NASD membership are to be furnished to the District Office staff. Subsection 1(a)(6) is proposed to be amended to clarify that the applicant must provide, in connection with its application submission, such other relevant information and documents as may be requested by the District Office staff.
Subsection 1(b) to Part I of Schedule C is proposed to be amended to clarify that the scheduling of an applicant's pre-membership interview, and the determination of which responsible personnel shall appear for the applicant at such interview, will be determined by the District Office staff.
Subsection (1)(d) to Part I of Schedule C is proposed to be amended to clarify that the District Committee's designated Subcommittee, rather than the District Office, shall consider the application submission.
Subsection 2(a) to Part I of Schedule C is proposed to be amended to clarify that it is the determination of the designated Subcommittee, rather than the District Office, that will be reviewed by the District Committee upon request of the applicant. Subsection 2(a) to Part I of Schedule C is also proposed to be amended to require that the applicant's request for review must be filed within 15 calendar days after the date of receipt of notification of the Subcommittee's determination.
Subsection 2(b) to Part I of Schedule C is proposed to be amended to clarify that, in connection with review by the District Committee, an applicant is entitled to appear before a Hearing Subcommittee of the District Committee and that no member of the District Committee who served as a member of the Subcommittee originally designated to review the applicant's submission and no member of the Hearing Subcommittee shall participate in the determination resulting from the District Committee's review.
Subsection 2(c) to Part I of Schedule C is proposed to be amended to clarify that the District Committee's determination of the record developed before it shall be made independent of the determination of the Subcommittee designated by the District Committee.
Subsection 2(d) to Part I of Schedule C is proposed to be amended to clarify that the District Committee's determination shall be subject to review by the NBCC upon request by the applicant if filed within 15 calendar days after the date of notification to the applicant by the District Committee of its determination.
Subsection 2(e) to Part I of Schedule C is proposed to be amended to clarify that in connection with review by the NBCC, the applicant has the right to appear before a Subcommittee of the NBCC.
Subsection 2(f) to Part I of Schedule C is proposed to be amended to clarify that the NBCC's determination of the record shall be made independent of the determination of the Subcommittee designated by the District Committee, and shall constitute final action for the NASD for purposes of Subsection (2)(h) to Part I of Schedule C unless discretionary review is called for by the Board of Governors. Subsection 2(f) is also proposed to be amended to clarify that a decision by the Board pursuant to its power of discretionary review shall constitute final action for purposes of Subsection (2)(h) to Part I of Schedule C. Such determination and its rationale shall be communicated to the applicant in writing.
Proposed new Subsection (2)(g) to Part I of Schedule C to the By-Laws is intended to clarify that review by the Board of Governors of NBCC determinations is discretionary and may occur solely on the request of one or more governors, and not at the request of the applicant. Any such review shall be in accordance with the resolutions of the Board governing the review of NBCC determinations. The Board may affirm, reverse, or modify an NBCC decision. The commencement of the review shall operate as a stay of any action by the Subcommittee designated by the District Committee and any determination by the NBCC until a decision is reached by the Board.
Old Subsection (2)(g) to Part I of Schedule C is proposed to be designated Subsection (2)(h) and clarifies that the applicant may apply for review to the Securities and Exchange Commission (SEC) of any determination by the NBCC or the Board.
Old Subsection (2)(h) to Part I of Schedule C is proposed to be designated Subsection (2)(i) and clarifies that the requirements of the subparagraph apply to determinations of restrictions placed on the applicant made by the NBCC or a Subcommittee designated by the District Committee, as well as to such determinations made by the Board or a District Committee.
Section 3 to Part I of Schedule C— Subsection (3)(a) to Part I of Schedule C is proposed to be amended to clarify that review and removal or modification of restrictions placed on the applicant shall be done by a Subcommittee designated by the District Committee.
Subsection (3)(b) to Part I of Schedule C is proposed to be amended to clarify that modifications of restrictions shall be subject to review by the District Committee and the NBCC, as well as by the Board and the SEC. Subsection (3)(b) to Part I of Schedule C is also proposed to be amended to clarify that the refusal by a Subcommittee designated by the District Committee to remove or modify restrictions shall also be subject to review, but only upon request of the member filed with the District Committee within 10 calendar days after the date of notification of such refusal.
Request For Vote
The proposed amendments clarify the process by which an applicant for NASD membership is accepted, denied, or accepted with limitations and eliminates any ambiguity in the NASD By-Laws and the Schedules to the By-Laws with respect to the application and administration of such process. The Board of Governors considers the proposed amendment necessary and appropriate and recommends that members vote their approval. The text of the proposed new rule that requires member vote is below. 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 May 31, 1994. The amendment would not take effect until it is filed with and approved by the SEC.
Questions regarding this Notice may be directed to Robert J. Smith, Attorney, Office of General Counsel, (202)728-8176.
Text Of Amendments To Article III And Schedule C Of The NASD By-Laws
(Note: New language is underlined; deletions are in brackets.)
Membership Application for Membership
Sec. 1.
(a) Unchanged.
(b) Any application received by the Corporation shall be referred to the District Committee of the [d]District in which the applicant has his principal place of business, and if [a majority of the members of] such District Committee or a Subcommittee designated by such District Committee determines that the applicant has satisfied all of the admission requirements of the [By-Laws] Corporation, it shall [recommend the applicant's admission to the membership and promptly notify the Secretary of the Corporation of such recommendation] promptly notify the Association's Membership Department of its determination.
(c) If [a majority of the members of] such District Committee or a Subcommittee designated by such District Committee determines that the applicant fails to satisfy all of the admission requirements of the [By-Laws] Corporation, it shall promptly notify the [Secretary of the Corporation who shall thereafter take appropriate action as of the date when posted to the member ship roll] Association's Membership Department of its determination.
(d) Unchanged.
* * * * *
Schedule C
Part I
APPLICATIONS FOR MEMBERSHIP
(1)
Pre-Membership Interviews
(a) An applicant for membership in the Corporation shall furnish to the District Office
staff for the District in which it has or intends to have its principal place of business:
(1) a copy of its current submission to the Securities and Exchange Commission pursuant to Rule 15bl-2(c) under the Securities Exchange Act of 1934;
(2) its most recent trial balance, balance sheet, supporting schedules and computation of net capital;
(3) a copy of its written supervisory procedures;
(4) a list of all officers, directors, general partners, employees and other persons who will be associated with it at the time of admission to membership;
(5) a description of business activities in which it intends to engage; and
(6) such other relevant information and documents as may be requested by the District Office staff.
Unless otherwise determined by a
Subcommittee designated by the District [c]Committee, an applicant's failure to respond or a materially inadequate response to a request for information by the District Office
staff within sixty (60) days of the request shall result in the termination of that application.
(b) Before an applicant shall be admitted to membership in the Corporation, and within a reasonable period of time after receipt of the foregoing information, the District Office staff shall schedule a pre-membership interview at which responsible personnel of the applicant, as determined by the District Office staff, shall personally appear at the District Office. At such interview, the applicant shall demonstrate, in accordance with the criteria listed in Section (1)(c) hereof, the appropriateness of its admission to membership in the Corporation to conduct the type of business intended in the manner specified in its submission. Unless otherwise determined by a Subcommittee designated by the District [c]Committee, an applicant shall have twelve (12) months, from the date of application made in accordance with Section 1(a) above, to complete the premembership review process. Failure to complete requirements for review by a Subcommittee designated by the District [c]Committee by that date shall result in the termination of that application.
(c) The pre-membership interview shall address the applicant's business plans to determine their adequacy and consistency with the federal securities laws and the rules of the Corporation; good business practices in the investment banking or securities business; a member's fiduciary obligation to its customers; and the public interest and the protection of investors. The pre-membership interview shall review, among other things:
(1) the nature, adequacy, source and permanence of applicant's capital and its arrangements for additional capital should a business need arise;
(2) the applicant's proposed record-keeping system;
(3) the applicant's proposed internal procedures, including compliance procedures;
(4) the applicant's familiarity with applicable NASD rules and federal securities laws;
(5) the applicant's capability to properly conduct the type of business intended in view of the:
A. number, experience and qualifications of the persons to be associated with it at the time of its admission to membership,
B. its planned facilities,
C. arrangements, if any, with banks, clearing corporations and others, to assist it in the conduct of its securities business,
D. supervisory personnel, methods and procedures; and
(6) other factors relevant to the scope and operation of its business.
(d) Within thirty (30) days after the conclusion of such pre-membership interview, or if further information and/or documents are requested, within thirty (30) days of the receipt of such information or documents, [the District Office] a Subcommittee designated by the District Committee shall consider the application and shall notify the applicant in writing whether its application has been granted, denied, or granted subject to restrictions on its business activities, and provide the rationale for such determination.
(e) In all cases where restrictions are placed on its business activities, the applicant shall, prior to approval of membership, execute a written agreement with the Corporation agreeing to abide by the restrictions specified in the determination and agreeing not to modify its business activities in any way inconsistent with such agreement without first notifying the Corporation and receiving its written approval. These restrictions shall remain in effect and are binding on the applicant and all successors to the ownership or control of the applicant until modified pursuant to [paragraph] Section (3) below.
(2)
Procedures for Review by the District Committee and the Board of Governors
(a) The [District Office's] Subcommittee's determination shall be [reviewed] subject to review by the relevant District Committee upon request made by the applicant* filed within 15 calendar days after the date [of receipt] of the notification. Until completion of the District Committee's review, an applicant denied membership shall not be admitted to membership, and an applicant admitted to member ship subject to restrictions on its business activities may engage in business consistent with such restrictions only after it has executed the agreement required by [paragraph] Section (1)(e) hereof.
(b) In connection with review by the District Committee, the applicant shall have the right to appear before a Hearing [s] Subcommittee of the District Committee, or the Hearing [s] Subcommittee may require such appearance. The applicant may present evidence and be represented by counsel. The Hearing [s]Subcommittee may request additional information to assist it in reaching a determination. A record shall be kept of the proceedings. No member of the District Committee who served as a member of the Subcommittee designated pursuant to Section 1(d) shall participate in the determination by the District Committee.
(c) The District Committee, after consideration of the record before it developed by the Hearing Subcommittee and the criteria contained in Section (1)(c), above, shall within a reasonable time after the close of the record, notify the applicant in writing that its application has been granted, denied or granted subject to restrictions on its business activities and provide the rationale for such determination.
The District Committee's determination shall be made independent of the determination of the [District Office] Subcommittee designated by the District Committee and shall not be limited thereby.
(d) The District Committee's determination shall be [reviewed] subject to review by the [Board of Governors] National Business Conduct Committee (NBCC) upon request made by the applicant, filed within 15 calendar days after the date [of receipt] of the notification. The [Board of Governors] NBCC may call for review any District Committee determination within forty-five calendar days [of] after the date of the notification. During the pendency of such review, an applicant denied membership shall not be admitted to membership and an applicant admitted to member ship subject to restrictions on its business activities may engage in business consistent with such restrictions only after it has executed the agreement required by [paragraph] Section (1)(e), above.
(e) In connection with review by the [Board of Governors] NBCC. the applicant shall have the right to appear before a [s] Subcommittee of the [Board of Governors] NBCC. or the NBCC [s]Subcommittee may require such appearance. The applicant may supplement the record developed before the District Committee and be represented by counsel. The NBCC [s]Subcommittee may request additional information to assist the [Board of Governors] NBCC in reaching a determination. A record shall be kept of the proceedings.
(f) Unless a matter is called for discretionary review by the Board of Governors (Board) pursuant to Section (2)(g). [T]the [Board of Governors] NBCC. after consideration of the record before it developed by the NBCC Subcommittee, and the criteria stated in Section (1)(c), above, shall within a reasonable period of time after close of the record before it, notify the applicant in writing that its application has been granted, denied or granted subject to restrictions on its business activities, provide the rationale for such determination, and shall constitute final action for the NASD for purposes of Section (2)(h) below. The [Board of Governors'] NBCC's determination shall be made independent of the determinations of the [District Office] Subcommittee designated by the District Committee and District Committee, and shall not be limited thereby. In the event of discretionary review by the Board of Governors, the decision of the Board shall constitute final action of the NASD for the purposes of Section (2)(h) below and the applicant shall be promptly notified in writing that its application has been granted, denied or granted subject to restrictions in its business activities, and shall be provided the rationale for such determination.
(g) Determinations of the NBCC may be reviewed by the Board of Governors solely on the request of one or more Governors. Such review, which may be undertaken solely at the discretion of the Board, shall be in accordance with resolutions of the Board governing the review of NBCC determinations. In reviewing any NBCC determination of an application for membership, the Board may affirm, reverse or modify any decision to accept, deny or accept subject to restrictions, an applicant. Discretionary review by the Board shall operate as a stay of any action or denial by the Subcommittee designated by the District Committee and any determination by the NBCC. until a decision is rendered by the Board.
[(g)] (h) The applicant may apply for review of the NBCC's or the Board of Governors determination to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended.
[(h)] (i) In any case where restrictions have been placed upon its business activities by the Board of Governors. NBCC. [or] a District Committee, or a Subcommittee designated by a District Committee, the applicant shall, prior to approval of membership, execute the agreement required by paragraph (1)(e), above.
(3)
Removal of Restrictions Imposed
(a) Upon written request by the member, any restrictions on the business activities of a member shall be reviewed and may be removed or modified by a Subcommittee designated by the District Committee for the District in which the member currently has its principal place of business, when, in the [District Committee's] Subcommittee's judgment, the member has demonstrated that such action is appropriate in light of the criteria contained in Section (1)(c), above. In doing so, the District Committee shall consider the circumstances which gave rise to the imposition of the restrictions, the operations of the member since the imposition of the restrictions and any new evidence submitted in connection with the member's request.
(b) Any modification of restrictions shall be subject to review by the District Committee and the NBCC or the Board of Governors and the SEC pursuant to the procedures provided in Section (2), above. A refusal by a Subcommittee designated by a District Committee to remove or modify any restrictions shall be similarly reviewed but only upon [application] request of the member filed with the [Board of Governors] District Committee that is filed within ten calendar days after the date of notification of such refusal.
(c) Should the restrictions on a member's activity be modified, the agreement required by [paragraph] Section (1)(e), above, shall be modified accordingly.
(4) Changes in Ownership or Control of Existing Members
Should the ownership or control of an existing member change, the Corporation may, in its discretion, condition continuance in membership in the Corporation on prompt compliance with the pre-member-ship interview procedures contained in this Part I.
(5) Notification to the District Office of Certain Events
Members are required to notify in writing the Corporation's District Office for the District in which the member's main office is located no later than ten (10) business days after any of the following specified events: (1) any merger of the member; (2) an acquisition by the member; (3) an acquisition of the member or substantially all of its assets; and (4) any change in the entity ownership or partnership capital of the member which results in one person or entity owning 50% or more of such equity ownership or partnership capital.
