Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change To Amend the By-Laws of NASD To Implement Governance and Related Changes To Accommodate the Consolidation of the Member Firm Regulatory Functions of NASD and NYSE Regulation, Inc., 14149-14161 [E7-5422]

Download as PDF Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices proposed rule change (SR–CBOE–2006– 95), as modified by Amendment Nos. 1 and 2, be, and it hereby is approved on an accelerated basis for a six-month pilot period ending on September 19, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.20 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–5423 Filed 3–23–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55495; File No. SR–NASD– 2007–023] Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing of Proposed Rule Change To Amend the By-Laws of NASD To Implement Governance and Related Changes To Accommodate the Consolidation of the Member Firm Regulatory Functions of NASD and NYSE Regulation, Inc. March 20, 2007. cprice-sewell on PROD1PC66 with NOTICES Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 19, 2007, the National Association of Securities Dealers, Inc. (‘‘NASD’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by NASD. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASD is proposing to amend the ByLaws of NASD (‘‘NASD By-Laws’’) to implement governance and related changes to accommodate the consolidation of the member firm regulatory functions of NASD and NYSE Regulation, Inc. (‘‘NYSE Regulation’’). The proposed rule change also would make limited conforming changes to the By-Laws of NASD Regulation, Inc. (‘‘NASD Regulation By-Laws’’). The text of the proposed rule change is available on the NASD’s Web site (http://www.nasd.com), at the principal office of NASD, and at the 20 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 Commission’s Public Reference Room. The text of Exhibit 5 of the proposed rule change is also available on the Commission’s Web site (http:// www.sec.gov). II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NASD included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NASD has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background and Reasons for the Transaction The securities industry—both domestically and internationally—is in the midst of dramatic change. As the industry changes, it has become clear that the self-regulatory organization (‘‘SRO’’) model must be adapted to ensure efficient and effective regulation. At the moment, both NASD and NYSE Regulation oversee the activities of U.S.based broker-dealers doing business with the public, approximately 170 of which are regulated by both organizations. The result is a duplicative, sometimes conflicting system that makes inefficient use of resources and, as such, can be detrimental to the ultimate goal of investor protection. NASD has long supported the idea of one SRO having responsibility for all member firm regulation.3 At the same time, the SEC, Congress, securities firms, and independent observers have long encouraged greater efficiencies, clarity and cost savings in the regulation of America’s financial markets. For these reasons, NASD and NYSE Regulation joined together proactively to design a system that would better meet the needs of today’s investors and securities firms. With the support and encouragement of the SEC, NASD and NYSE Group, Inc. (‘‘NYSE Group’’) representatives began 3 See NASD’s comment letter dated March 15, 2005 in response to the SEC’s Concept Release Concerning Self-Regulation, Securities Exchange Act Release No. 50700 (November 18, 2004), 69 FR 71256 (December 8, 2004) (File No. S7–40–04). PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 14149 meeting in June 2006 to discuss options for changes to the self-regulatory system. A determination was made that the scope of the discussions should be limited to eliminating redundant member regulation and not to combine the market regulatory responsibilities of NASD and NYSE Regulation. On November 28, 2006, NASD and the NYSE Group announced the plan to consolidate their member regulation operations into a combined organization that will be the sole U.S. private-sector provider of member firm regulation for securities firms that do business with the public (the ‘‘Transaction’’).4 This consolidation will streamline the broker-dealer regulatory system, combine technologies, permit the establishment of a single set of rules and group examiners with complementary areas of expertise in a single organization—all of which will serve to enhance oversight of U.S. securities firms and help ensure investor protection. Moreover, the new organization will be committed to reducing regulatory costs and burdens for firms of all sizes through greater regulatory efficiency. The goals of the consolidation plan are to: • Establish a new organization that will be the single SRO for all securities firms doing business with the public in the U.S.; • Build and sustain the confidence critical to the operation of vibrant capital markets; • Increase efficient, effective, and consistent regulation of securities firms; • Provide cost savings to securities firms of all sizes; and • Strengthen investor protection and market integrity. None of NASD’s current functions and activities will be eliminated as a result of the Transaction. The new organization will be responsible for: • Regulatory oversight of all securities firms that do business with the public; • Professional training, testing and licensing of registered persons; • Arbitration and mediation; • Market regulation by contract for The Nasdaq Stock Market, Inc. (‘‘Nasdaq’’), the American Stock Exchange LLC, and the International Securities Exchange, LLC; and • Industry utilities, such as Trade Reporting Facilities and other over-thecounter operations. The consolidation plan addresses key issues raised in the SEC’s 2004 Concept 4 At the closing of the Transaction, NASD will adopt a new corporate name. The proposed rule change refers to the newly named entity as the ‘‘New SRO.’’ E:\FR\FM\26MRN1.SGM 26MRN1 14150 Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices Release Concerning Self-Regulation: (1) The inherent conflicts of interest between SRO regulatory operations and members, market operations, issuers and stockholders; (2) the costs and inefficiencies of multiple SROs, arising from multiple SRO rulebooks, inspection regimes and staff; and (3) the funding SROs have available for regulatory operations and the manner in which SROs allocate revenue to regulatory operations.5 The closing of the Transaction and the consolidation of the member firm regulatory functions of the two organizations is subject to the SEC’s approval of this proposed rule change, the execution of definitive agreements between NASD and NYSE Group and obtaining certain additional regulatory approvals.6 Composition of the New SRO Board of Governors During the Transitional Period The proposed rule change will implement the governance changes at the combined organization, including a Board structure that balances public and industry representation, and designates certain governor seats to represent member firms of various sizes. As further described below, the new governance structure guarantees industry participation that provides for fair and balanced member representation on the Board. For a transitional period commencing on the date of closing of the Transaction and ending on the third anniversary of the date of closing (the ‘‘Transitional Period’’), the New SRO Board of Governors (‘‘New SRO Board’’) will consist of 23 governors as follows: (1) Eleven of the governors will be ‘‘Public Governors’’; (2) ten of the governors will be ‘‘Industry Governors’’; and (3) two of the governors will initially be Richard G. Ketchum, Chief Executive Officer (‘‘CEO’’) of NYSE Regulation and Mary L. Schapiro, CEO of NASD. Mr. Ketchum will serve as Non-Executive Chairman of the New SRO for a term of three years. Ms. Schapiro will serve as CEO of the New SRO. 5 See supra note 3. March 7, 2007, NASD and NYSE Group filed notification reports with the Department of Justice and the Federal Trade Commission under the HartScott-Rodino Antitrust Improvements Act of 1976. The waiting period for such a filing will terminate 30 calendar days after the filing, unless the waiting period is extended. NASD believes that the completion of the Transaction will not violate the antitrust laws. NASD also has received a favorable ruling by the Internal Revenue Service that the Transaction will not affect the tax-exempt status of NASD or NASD Regulation. NASD and NYSE Group will seek to satisfy all regulatory filing obligations and observe any required waiting periods prior to the completion of the Transaction. cprice-sewell on PROD1PC66 with NOTICES 6 On VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 The eleven Public Governors will have no material business relationship with a broker or dealer or an SRO registered under the Exchange Act. Of the ten Industry Governors, (1) Three will be registered with a member that employs 500 or more registered persons (the ‘‘Large Firm Governors’’); (2) one will be registered with a member that employs at least 151 and no more than 499 registered persons (the ‘‘MidSize Firm Governor’’); (3) three will be registered with a member that employs at least one and no more than 150 registered persons (the ‘‘Small Firm Governors’’); (4) one will be associated with a floor member of the New York Stock Exchange (the ‘‘Floor Member Governor’’); (5) one will be associated with an independent dealer or insurance affiliate (the ‘‘Independent Dealer/Insurance Affiliate Governor’’); and (6) one will be associated with an investment company affiliate (the ‘‘Investment Company Affiliate Governor’’). The Industry Governors and Public Governors will be appointed or nominated during the Transitional Period as follows: • The three Small Firm Governors will be nominated by the NASD Board and elected by members that have at least one and no more than 150 registered persons; provided that members of that size also can nominate such candidates. • The one Mid-Size Firm Governor will be nominated jointly by the Board of Directors of NYSE Group (‘‘NYSE Group Board’’) and the NASD Board and elected by members that have at least 151 and no more than 499 registered persons; provided that members of that size also can nominate such candidates. • The three Large Firm Governors will be nominated by the NYSE Group Board and elected by members that have 500 or more registered persons; provided that members of that size also can nominate such candidates. • Five Public Governors will be appointed by the NYSE Group Board. • Five Public Governors will be appointed by the NASD Board. • One Public Governor will be appointed jointly by the NYSE Group Board and the NASD Board. • The one Floor Member Governor will be appointed by the NYSE Group Board. • The one Independent Dealer/ Insurance Affiliate Governor will be appointed by the NASD Board. • The one Investment Company Affiliate Governor will be appointed jointly by the NYSE Group Board and the NASD Board. PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 Effective as of closing of the Transaction, the NYSE Group Board and the NASD Board in office prior to the closing will appoint the Public Governors and Industry Governors they, either individually or jointly, have the power to appoint. The Public Governors will hold office for the Transitional Period. The three Large Firm Governors, three Small Firm Governors and one Mid-Size Governor will be elected as Governors at the first annual meeting of members following the closing, which is expected to be held within ninety days after closing of the Transaction and will hold office until the first annual meeting of members following the Transitional Period. During the interim period from closing of the Transaction until the annual meeting, these seven seats will be filled by three interim Industry Governors appointed by the NASD Board prior to the closing of the Transaction from industry governors currently on the NASD Board, three interim Industry Governors appointed by the NYSE Group Board and one interim Industry Governor jointly appointed by the NYSE Group Board and the NASD Board prior to the closing of the Transaction. As a result of the NASD By-Law amendments, members will no longer have the ability to vote for all New SRO Board candidates in elections, but will have an opportunity to vote on designated seats on the New SRO Board. Specifically, firms will vote for industry nominees that are similar in size to their own firm. This means that small firms and large firms will vote for candidates running for the seats reserved for their firm size and the mid-sized firms will likewise vote for the mid-sized firm seat. All other New SRO Board seats will be appointed as described above. All members will continue to have the ability to vote on any future amendments to the New SRO By-Laws, as well as in district elections. The New SRO Board will have a Governor who will preside over executive sessions of the New SRO Board in the event the Non-Executive Chairman is recused (‘‘Lead Governor’’). The Lead Governor will be selected by the New SRO Board, after consultation with the CEO. The Board, the CEO, the Non-Executive Chairman and the Lead Governor will have the authority to call meetings of the New SRO Board. Both the CEO and Non-Executive Chairman, and for matters from which the CEO and Non-Executive Chairman are recused from considering, the Lead Governor, will have the authority to place items on the New SRO Board agendas. E:\FR\FM\26MRN1.SGM 26MRN1 cprice-sewell on PROD1PC66 with NOTICES Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices Governor Vacancies During the Transitional Period In the event of a vacancy in the governor position held by the CEO of NYSE Regulation during the Transitional Period, the then CEO of NYSE Regulation will serve as a governor for the remainder of the Transitional Period. If the CEO of NYSE Regulation as of closing of the Transaction ceases to occupy the office of Non-Executive Chairman for any reason during the Transitional Period, then his successor as Non-Executive Chairman shall be selected by and from a committee comprised of the Governors that were appointed or nominated by the NYSE Group Board, with the exception that those Governors that also serve as NYSE Group directors may not become Non-Executive Chairman nor may his successor as CEO of NYSE Regulation become Non-Executive Chairman. In the event of any vacancy among the Large Firm Governors, the Mid-Size Firm Governor, or the Small Firm Governors during the Transitional Period, such vacancy shall only be filled by, and nominations for persons to fill such vacancy shall be made by, a committee of the New SRO Board composed of the other Governors appointed or nominated by the NYSE Group Board in the case of a Large Firm Governor vacancy; such vacancy shall only be filled by the Board, and nominations for persons to fill such vacancy shall be made by the Nominating Committee in the case of a Mid-Size Firm Governor vacancy; or such vacancy shall only be filled by, and nominations for persons to fill such vacancy shall be made by, a committee of the New SRO Board composed of the other Governors appointed or nominated by the NASD Board in the case of a Small Firm Governor vacancy. In the event the remaining term of office of any such governor is more than twelve months, nominations shall be made as set forth above, but such vacancy will be filled by the New SRO members entitled to vote on such governor position at a meeting of such members called to fill the vacancy. In the event of any vacancy among the Floor Member Governor, the Investment Company Affiliate Governor or the Independent Dealer/Insurance Affiliate Governor during the Transitional Period, such vacancy shall only be filled by, and nominations for persons to fill such vacancy shall be made by, a committee of the New SRO Board composed of the other Governors appointed or nominated by the NYSE Group Board in the case of a Floor VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 Member Governor vacancy; such vacancy shall only be filled by the New SRO Board, and nominations for persons to fill such vacancy shall be made by the Nominating Committee in the case of an Investment Company Affiliate Governor vacancy; or such vacancy shall only be filled by, and nominations for persons to fill such vacancy shall be made by, a committee of the New SRO Board composed of other Governors appointed or nominated by the NASD Board in the case of an Independent Dealer/ Insurance Affiliate Governor vacancy. In the event of any vacancy among those Public Governors appointed by the NYSE Group Board, such vacancy shall only be filled by, and nominations for persons to fill such vacancy shall be made by, a committee of the New SRO Board composed of the other Governors appointed or nominated by the NYSE Group Board. In the event of any vacancy among those Public Governors appointed by the NASD Board, such vacancy shall only be filled by, and nominations for persons to fill such vacancy shall be made by, a committee of the New SRO Board comprised of the other Governors appointed or nominated by the NASD Board. In the event of any vacancy of the Public Governor position jointly appointed by the NYSE Group Board and the NASD Board, such vacancy shall only be filled by the New SRO Board, and nominations for persons to fill such vacancy shall be made by the Nominating Committee. 14151 Upon the expiration of the Transitional Period, the term of office of the CEO of NYSE Regulation as a member of the New SRO Board will automatically terminate and the authorized number of members of the New SRO Board will be reduced by one.7 As of the first annual meeting of members following the Transitional Period, the Large Firm Governors, the Mid-Size Firm Governor and the Small Firm Governors will be elected into three classes. The composition of the classes will be arranged as follows: • The first class, being comprised of one Large Firm Governor and one Small Firm Governor, will be elected for a term of office expiring at the first succeeding annual meeting of members; • The second class, being comprised of one Large Firm Governor, one MidSize Firm Governor and one Small Firm Governor, will be elected for a term of office expiring at the second succeeding annual meeting of members; and • The third class, being comprised of one Large Firm Governor and one Small Firm Governor, will be elected for a term of office expiring at the third succeeding annual meeting of members. While these classes are designed to ensure staggered board seats, at no time will there be less than ten Industry Governor positions on the New SRO Board. At each annual election following the first annual meeting of members after the Transitional Period, Large Firm Governors, Small Firm Governors, and Mid-Size Firm Governors will be elected for a term of three years to replace those whose terms expire. As of the first annual meeting of members following the Transitional Period, the Public Governors, the Floor Member Governor, the Independent Dealer/Insurance Affiliate Governor, and the Investment Company Affiliate Governor (the ‘‘Appointed Governors’’) will be divided by the New SRO Board into three classes, as equal in number as possible, with the first class holding office until the first succeeding annual meeting of members, the second class holding office until the second succeeding annual meeting of members, and the third class holding office until the third succeeding annual meeting of members. Each class will initially contain as equivalent a number as possible of Appointed Governors who were members of the New SRO Board appointed or nominated by the NYSE Group Board or are successors to such governor positions, on the one hand, and Appointed Governors who were members of the New SRO Board appointed or nominated by the NASD Board or are successors to such governor positions, on the other hand, to the extent the New SRO Board determines such persons are to remain Governors after the Transitional Period. At each annual election following the first annual meeting of members following the Transitional Period, Appointed Governors will be appointed by the New SRO Board for a term of three years to replace those whose terms expire. 7 Under Article VII, Section 4 of the New SRO ByLaws (Composition and Qualification of the Board), the total number of Governors is determined by the Board of Governors, with such number being no fewer than 16 nor more than 25 Governors. The number of Public Governors must exceed the number of Industry Governors. Role and Composition of the Nominating Committee The Nominating Committee will be a committee of the New SRO Board and will replace the current National Nominating Committee. For the first Composition of the New SRO Board After the Transitional Period PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 E:\FR\FM\26MRN1.SGM 26MRN1 14152 Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices annual meeting following the closing of the Transaction, nominations for the seven elected industry seats will not be made by the Nominating Committee, but instead by the NASD Board and the NYSE Group Board as constituted prior to the closing of the Transaction. In addition, prior to the closing, the NASD Board and the NYSE Group Board will identify and appoint persons for the eleven public seats and three remaining industry seats. During the Transitional Period, the Nominating Committee will be responsible solely for nominating persons to fill vacancies in governor seats for which the full New SRO Board has the authority to fill. Following the Transitional Period, the Nominating Committee will be responsible for nominating persons for appointment or election to the New SRO Board, as well as nominating persons to fill vacancies in appointed or elected governor seats. During the Transitional Period, members of the Nominating Committee will be appointed jointly by the New SRO CEO and the CEO of NYSE Regulation as of closing of the Transaction (or his duly appointed successor as Chair of the New SRO Board), subject to ratification of the appointees by the New SRO Board. Following the Transitional Period, the composition of the Nominating Committee will be determined by the New SRO Board. At all times, the number of Public Governors on the Nominating Committee must equal or exceed the number of Industry Governors on the Nominating Committee. In addition, the Nominating Committee must at all times be comprised of a number of governors that is a minority of the entire New SRO Board. The New SRO CEO may not be a member of the Nominating Committee. Proposed Changes and Comparison to Current NASD By-Laws The following chart summarizes the material proposed changes as compared to the current NASD By-Laws and the timing of their effectiveness. The following is only a summary; the text of the proposed rule change is available on the NASD’s Web site (http:// www.nasd.com), at the principal office of NASD, and at the Commission’s Public Reference Room. The text of Exhibit 5 of the proposed rule change is also available on the Commission’s Web site (http://www.sec.gov). Current By-Laws By-Laws effective at closing and for the transitional period By-Laws effective at the expiration of the transitional period Composition and Qualification of the Board. cprice-sewell on PROD1PC66 with NOTICES Topic The Board consists of no fewer than 15 nor more than 25 Governors, comprising (i) The Chief Executive Officer of the NASD, (ii) if the Board of Governors determines, from time to time, in its sole discretion, that the appointment of a second officer of the NASD to the Board of Governors is advisable, a second officer of the NASD, (iii) the President of NASD Regulation, (iv) the Chair of the National Adjudicatory Council and (v) no fewer than 12 and no more than 22 Governors elected by the members of the NASD. The Governors elected by the members of the NASD include a representative of an issuer of investment company shares or an affiliate of such an issuer, a representative of an insurance company, a representative of a national retail firm, a representative of a regional retail or independent financial planning member firm, a representative of a firm that provides clearing services to other NASD members, and a representative of an NASD member having not more than 150 registered persons. The number of Non-Industry Governors must exceed the number of Industry Governors. If the number of Industry and Non-Industry Governors is 13–15, the Board must include at least four Public Governors. If the number of Industry and Non-Industry Governors is 16–17, the Board must include at least five Public Governors. If the number of Industry and Non-Industry Governors is 18–23, the Board must include at least six Public Governors. As of Closing, and for the Transitional Period, the Board consists of 23 authorized members, consisting of (i) The Chief Executive Officer of the NASD, (ii) the Chief Executive Officer of NYSE Regulation, Inc., (iii) eleven Public Governors, (iv) a Floor Member Governor, an Independent Dealer/Insurance Affiliate Governor and an Investment Company Affiliate Governor and (v) three Small Firm Governors, one Mid-Size Firm Governor and three Large Firm Governors; provided, however that the Board will not include such Small Firm Governors, Mid-Size Firm Governor or Large Firm Governors, but rather will include three persons, who immediately prior to the Closing are Industry Governors, selected by the Board in office prior to the Closing, three persons, who immediately prior to the Closing qualified as Industry Governors pursuant to the By-Laws in existence prior to the Closing, selected by the Board of Directors of NYSE Group, Inc., and one person, who immediately prior to the Closing qualified as an Industry Governor pursuant to the By-Laws in existence prior to the Closing, selected by the Board of Directors of NYSE Group, Inc. and the Board of Governors in office prior to the Closing jointly, until the election of such Small Firm Governors, Mid-Size Firm Governor and Large Firm Governors at the first annual meeting of members following the Closing. [NOTE: To allow for the possibility of a contested election, the nominees for the Small Firm Governor, Mid-Size Firm Governor or Large Firm Governor will be voted upon at an annual meeting of members which shall be held as soon as practicable after the closing of the Transaction and is expected to be held within ninety days of the closing of the Transaction.]. Same as By-Laws for the Transitional Period, except that: (i) The Chief Executive Officer of NYSE Regulation, Inc. is no longer a Governor; (ii) the total number of Governors is determined by the Board of Governors, with such number being no fewer than 16, nor more than 25 and (iii) the number of Public Governors is determined by the Board of Governors, provided such number must exceed the number of Industry Governors. VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 E:\FR\FM\26MRN1.SGM 26MRN1 Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices 14153 Current By-Laws By-Laws effective at closing and for the transitional period By-Laws effective at the expiration of the transitional period Term of Office of Governors .................. cprice-sewell on PROD1PC66 with NOTICES Topic The Chief Executive Officer and, if appointed, the second officer of the NASD, and the President of NASD Regulation serve as Governors until a successor is elected, or until death, resignation or removal. The Chair of the National Adjudicatory Council serves as a Governor for a term of one year, or until a successor is duly elected and qualified, or until death, resignation, disqualification or removal. The Governors elected by the members of the NASD are divided into three classes and hold office for a term of no more than three years, such term being fixed by the Board at the time of the nomination or certification of each such Governor, or until a successor is duly elected and qualified, or until death, resignation, disqualification or removal. The Chief Executive Officer serves as a Governor until a successor is elected, or until death, resignation or removal. The Chief Executive Officer of NYSE Regulation, Inc. as of Closing serves as a Governor during the Transitional Period, until death, resignation or removal. Effective as of Closing, the Board of Directors of NYSE Group, Inc. appoints the NYSE Public Governors, the Board in office prior to the Closing appoints the NASD Public Governors and the Board of Directors of NYSE Group, Inc. and the Board in office prior to the Closing jointly appoint the Joint Public Governor. Effective as of Closing, the Board of Directors of NYSE Group, Inc. appoints the Floor Member Governor, the Board of Governors in office prior to the Closing appoints the Independent Dealer/Insurance Affiliate Governor and the Board of Directors of NYSE Group, Inc. and the Board of Governors in office prior to the Closing jointly appoint the Investment Company Affiliate Governor. The Public Governors and the Floor Member Governor, the Investment Company Affiliate Governor and the Independent Dealer/Insurance Affiliate Governor appointed in accordance with the preceding paragraphs hold office for the Transitional Period, or until death, resignation, disqualification or removal. Three Large Firm Governors, three Small Firm Governors and one MidSize Governor are elected as Governors at the first annual meeting of members following the Closing (the ‘‘Initial Member Elected Governors’’). The Initial Member Elected Governors hold office until the first annual meeting of members following the Transitional Period, or until a successor is duly elected and qualified, or until death, resignation, disqualification or removal. Upon the expiration of the Transitional Period, the term of office of the Chief Executive Officer of NYSE Regulation, Inc. as a member of the Board automatically, and without any further action, terminates, such person no longer is a member of the Board and the authorized number of members of the Board automatically is reduced by one. The Chief Executive Officer serves as a Governor until a successor is elected, or until death, resignation or removal. Public Governors and the Floor Member Governor, the Independent Dealer/Insurance Affiliate Governor and the Investment Company Affiliate Governor (the ‘‘Appointed Governors’’) are appointed by the Board. As of the first annual meeting of members following the Transitional Period, the Appointed Governors are divided by the Board into three classes, as equal in number as possible, with the first class holding office until the first succeeding annual meeting of members, the second class holding office until the second succeeding meeting of members and the third class holding office until the third succeeding annual meeting of members, or until a successor is duly appointed and qualified, or until death, resignation, disqualification or removal. Each class initially contains as equivalent a number as possible of Appointed Governors who were members of the NYSE Group Committee during the Transitional Period or are successors to such Governor positions, on the one hand, and Appointed Governors who were members of the NASD Group Committee during the Transitional Period or are successors to such Governor positions, on the other hand, to the extent the Board determines such persons are to remain Governors after the Transitional Period. At each annual election following the first annual meeting of members following the Transitional Period, Appointed Governors are appointed by the Board for a term of three years to replace those whose terms expire. As of the first annual meeting of members following the Transitional Period, the Large Firm Governors, the Mid-Size Firm Governor and the Small Firm Governors are divided into three classes, as equal in number as possible, with the first class, being comprised of one Large Firm Governor and one Small Firm Governor, holding office until the first succeeding annual meeting of members, the second class, being comprised of one Large Firm Governor, one Mid-Size Firm Governor and one Small Firm Governor, holding office until the second succeeding annual meeting of members and the third class, being comprised of one Large Firm Governor and one Small Firm Governor, holding office until the third succeeding annual meeting of members, or until a successor is duly elected and qualified, or until death, resignation, disqualification or removal. At each annual election following the first annual meeting of members following the Transitional Period, Large Firm Governors, Small Firm Governors and the Mid-Size Firm Governor are elected for a term of three years to replace those whose terms expire. VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 E:\FR\FM\26MRN1.SGM 26MRN1 14154 Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices Current By-Laws By-Laws effective at closing and for the transitional period By-Laws effective at the expiration of the transitional period Filling of Vacancies ................................ cprice-sewell on PROD1PC66 with NOTICES Topic If an elected Governor position becomes vacant, whether because of death, disability, disqualification, removal or resignation, the National Nominating Committee nominates, and the Board elects by majority vote of the remaining Governors then in office, a person satisfying the classification (Industry, Non-Industry or Public Governor) for the governorship 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 is 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 stands for election in the next annual election. In the event the Chief Executive Officer of NYSE Regulation, Inc. as of Closing no longer serves as a Governor during the Transitional Period, the then Chief Executive Officer of NYSE Regulation, Inc. serves as a Governor for the remainder of the Transitional Period, until death, resignation or removal. In the event of any vacancy among the NYSE Public Governors, the Joint Public Governor or NASD Public Governors during the Transitional Period, such vacancy is only filled by, and nominations for persons to fill such vacancy are made by, the NYSE Group Committee in the case of a vacant NYSE Public Governor position, such vacancy is only filled by the Board, and nominations for persons to fill such vacancy are made by the Nominating Committee, in the case of a vacant Joint Public Governor position or such vacancy is only filled by, and nominations for persons to fill such vacancy are made by, the NASD Group Committee in the case of a vacant NASD Public Governor position. In the event of any vacancy among the Floor Member Governor, the Investment Company Affiliate Governor or the Independent Dealer/Insurance Affiliate Governor during the Transitional Period, such vacancy is only filled by, and nominations for persons to fill such vacancy are made by, the NYSE Group Committee in the case of a Floor Member Governor vacancy, such vacancy is only filled by the Board, and nominations for persons to fill such vacancy are made by the Nominating Committee, in the case of an Investment Company Affiliate Governor vacancy or such vacancy is only filled by, and nominations for persons to fill such vacancy are made by, the NASD Group Committee in the case of an Independent Dealer/Insurance Affiliate Governor vacancy. In the event of any vacancy among the Large Firm Governors, the Mid-Size Firm Governor or the Small Firm Governors during the Transitional Period, such vacancy is only filled by, and nominations for persons to fill such vacancy are made by, the NYSE Group Governor Committee in the case of a Large Firm Governor vacancy, such vacancy is only filled by the Board, and nominations for persons to fill such vacancy are made by the Nominating Committee, in the case of the Mid-Size Firm Governor vacancy or such vacancy is only filled by, and nominations for persons to fill such vacancy are made by, the NASD Governor Committee in the case of a Small Firm Governor vacancy: provided, however, that in the event the remaining term of office of any Large Firm, MidSize Firm or Small Firm Governor position that becomes vacant is for more than 12 months, nominations shall be made as set forth above in this paragraph, but such vacancy is filled by the members of the New SRO entitled to vote thereon at a meeting thereof convened to vote thereon. In the event of any vacancy among the Large Firm Governors, the Mid-Size Firm Governor or the Small Firm Governors, such vacancy is only filled by the Large Firm Governor Committee in the case of a Large Firm Governor vacancy, the Board in the case of a Mid-Size Firm Governor vacancy or the Small Firm Governor Committee in the case of a Small Firm Governor vacancy; provided, however, that in the event the remaining term of office of any Large Firm, Mid-Size Firm or Small Firm Governor position that becomes vacant is for more than 12 months, such vacancy is filled by the members of the New SRO entitled to vote thereon at a meeting thereof convened to vote thereon. All other vacancies are filled by the Board. VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 E:\FR\FM\26MRN1.SGM 26MRN1 Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices 14155 Topic Current By-Laws By-Laws effective at closing and for the transitional period By-Laws effective at the expiration of the transitional period Nominations ........................................... The National Nominating Committee, which is not a committee of the Board, nominates and, in the event of a contested election, may support: Industry, Non-Industry and Public Governors for each vacant or new Governor position on the NASD Board for election by the membership; Industry, Non-Industry and Public Directors for each vacant or new position on the NASD Regulation Board and the NASD Dispute Resolution Board for election by the stockholder; and Industry, Non-Industry, and Public members for each vacant or new position on the National Adjudicatory Council for appointment by the NASD Regulation Board. In the case of the first annual meeting of members following the Closing, nominations are by the Board of Directors of NYSE Group, Inc. with respect to Large Firm Governors, jointly by the Board of Directors of NYSE Group, Inc. and the Board in office prior to the Closing with respect to the Mid-Size Firm Governor and by the Board in office prior to the Closing with respect to Small Firm Governors. Composition and Qualifications of the Nominating Committee. The National Nominating Committee consists of no fewer than six and no more than nine members. The number of Non-Industry committee members equals or exceeds the number of Industry committee members. If the National Nominating Committee consists of six members, at least two must be Public committee members. If the National Nominating Committee consists of seven or more members, at least three must be Public committee members. No officer or employee of the NASD serves as a member of the National Nominating Committee in any voting or non-voting capacity. No more than three of the National Nominating Committee members and no more than two of the Industry committee members are current members of the NASD Board. A National Nominating Committee member may not simultaneously serve on the National Nominating Committee and the Board, unless such member is in his or her final year of service on the Board, and following that year, that member may not stand for election to the Board until such time as he or she is no longer a member of the National Nominating Committee. NASD is required to have an Audit Committee and a National Nominating Committee. The Nominating Committee is jointly populated by the Chief Executive Officer and the Chief Executive Officer of NYSE Regulation, Inc. as of Closing (or his duly appointed or elected successor as Chair of the Board), subject to ratification of the appointees by the Board. The number of Public Governors on the Nominating Committee equals or exceeds the number of Industry Governors on the Nominating Committee. The Nominating Committee is at all times comprised of a number of members which is a minority of the entire Board and the Chief Executive Officer may not be a member of the Nominating Committee. The Nominating Committee, which is a committee of the Board, nominates and, in the event of a contested election, may support: Large Firm, MidSize Firm, Small Firm, Public, Floor Member, Independent Dealer/Insurance Affiliate and Investment Company Affiliate Governors for each vacant or new Governor position on the New SRO Board; Industry and Public Directors for each vacant or new position on the NASD Regulation Board and the NASD Dispute Resolution Board for election by the stockholder; and Industry and Public members for each vacant or new position on the National Adjudicatory Council for appointment by the NASD Regulation Board. The Nominating Committee consists of such number of members of the Board as the Board determines from time to time. The number of Public Governors on the Nominating Committee equals or exceeds the number of Industry Governors on the Nominating Committee. The Nominating Committee is at all times comprised of a number of members which is a minority of the entire Board and the Chief Executive Officer may not be a member of the Nominating Committee. cprice-sewell on PROD1PC66 with NOTICES Required Board Committees ................. VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 PO 00000 Frm 00084 Fmt 4703 New SRO is required to have the following committees of the Board: the NASD Group Committee; The NYSE Group Committee; the Small Firm Governor Committee and the Large Firm Governor Committee, which have the authority described above in ‘‘Filling of Vacancies’’ and below in ‘‘Chair.’’ New SRO also is required to have Audit, Finance and Nominating Committees and, during the first year of the Transitional Period or as may be extended thereafter by the Board, an Integration Committee. Sfmt 4703 E:\FR\FM\26MRN1.SGM New SRO is required to have the following committees of the Board: The Small Firm Governor Committee and the Large Firm Governor Committee, which have the authority described above in ‘‘Filling of Vacancies.’’ New SRO also is required to have Audit, Finance and Nominating Committees. 26MRN1 14156 Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices Topic Current By-Laws By-Laws effective at closing and for the transitional period By-Laws effective at the expiration of the transitional period Composition of Board Committees ........ Unless otherwise provided in the ByLaws, any committee having the authority to exercise the powers and authority of the Board has 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. The Small Firm Governor Committee and the Large Firm Governor Committee are composed as described below in the description of such defined terms. Unless otherwise provided in the By-Laws, any other committee having the authority to exercise the powers and authority of the Board has a number of Public Governors as members thereof in excess of the number of Industry Governors which are members thereof. Executive Committee Composition ........ The Executive Committee consists of no fewer than five and no more than eight Governors. The Executive Committee includes the Chief Executive Officer of the NASD, and at least one Director of NASD Regulation. The Executive Committee has a percentage of Non-Industry committee members at least as great as the percentage of Non-Industry Governors on the whole Board and a percentage of Public committee members at least as great as the percentage of Public Governors on the whole Board. No such committee ............................... The NASD Group Committee, the NYSE Group Committee, the Small Firm Governor Committee and the Large Firm Governor Committee are composed as described below in the description of such defined terms. Unless otherwise provided in the ByLaws, any other committee having the authority to exercise the powers and authority of the Board has a number of Public Governors as members thereof in excess of the number of Industry Governors which are members thereof. In addition, any committee of the Board having the authority to exercise the powers and authority of the Board (with the exception of the Large Firm Governor Committee, the Small Firm Governor Committee, the NASD Group Committee and the NYSE Group Committee) also has (i) a percentage of members (to the nearest whole number of committee members) that are members of the NASD Group Committee at least as great as the percentage of Governors on the Board that are members of the NASD Group Committee; and (ii) a percentage of members (to the nearest whole number of committee members) that are members of the NYSE Group Committee at least as great as the percentage of Governors on the Board that are members of the NYSE Group Committee. The Executive Committee consists of no fewer than five and no more than eight Governors. The Executive Committee includes the Chief Executive Officer of the New SRO and the Chair of the Board. Integration Committee ............................ cprice-sewell on PROD1PC66 with NOTICES Annual Meetings of Members ................ An annual meeting of members of the NASD is held on such date and at such place as the Board designates. The business of the annual meeting includes the election of the members of the Board, Industry, Non-Industry and Public, by all of the members of the NASD. Authority to Call Special Meetings of the Board. Not specified ......................................... VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 PO 00000 Frm 00085 Fmt 4703 Same as Transitional Period. The Board shall appoint an Integration Not applicable. Committee with a term of one year unless continued for a longer period by resolution of the Board. The Chair of the Board shall be the Chair of the Integration Committee. Except for the first annual meeting fol- An annual meeting of members of the lowing the Closing at which Large New SRO is held on such date and Firm Governors, the Mid-Size Firm at such place as the Board desGovernor and Small Firm Governors ignates. The business of the annual are elected, there are no annual meeting includes the election of the meetings of members during the Small, Mid-Size and Large Firm Transitional Period. At such first anmembers of the Board. Small Firm nual meeting, Small Firm members members are only entitled to vote for are only entitled to vote for the electhe election of Small Firm Governors, tion of Small Firm Governors, MidMid-Size Firm members are only enSize Firm members are only entitled titled to vote for the election of the to vote for the election of the MidMid-Size Firm Governor and Large Size Firm Governor and Large Firm Firm members are only entitled to members are only entitled to vote for vote for the election of Large Firm the election of Large Firm Governors. Governors. Special meetings of the Board of the Same as the Transitional Period. New SRO may be called by the Board, the Chief Executive Officer of the New SRO, the Chair or the Lead Governor. Sfmt 4703 E:\FR\FM\26MRN1.SGM 26MRN1 Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices Topic Current By-Laws By-Laws effective at closing and for the transitional period Authority to Include Items on the Agenda for Meetings of the Board. Not specified ......................................... Chair ....................................................... Elected by the Board from among its members. Each of the Chief Executive Officer of the New SRO and the Chair, and with respect to matters from which the Chief Executive Officer of the New SRO and the Chair recuse themselves, the Lead Governor, has the authority to include matters on the agenda of a meeting of the Board. The Chair is the Chief Executive Officer of NYSE Regulation, Inc. as of Closing so long as he remains a Governor. In the event the Chief Executive Officer of NYSE Regulation, Inc. as of the Closing ceases to be a Chair during the Transitional Period, subject to the Restated Certificate of Incorporation and the By-Laws, the Chair is selected by the NYSE Group Committee from among its members; provided that the Chair so selected may not be a member of the Board of Directors of NYSE Group, Inc. nor may the successor Chief Executive Officer of NYSE Regulation, Inc. serve as Chair. The proposed amendments to the NASD By-Laws also include changes or additions to certain defined terms. In addition to changes to accommodate the new governance structure, the proposed rule change would amend the definition of ‘‘disqualification’’ in the NASD ByLaws to conform to the federal securities laws, such that any person subject to a statutory disqualification under the 14157 By-Laws effective at the expiration of the transitional period Same as the Transitional Period. Elected by the Board from among its members. Exchange Act also would be subject to disqualification under NASD rules.8 These changes or additions to the defined terms in the NASD By-Laws include the following: Current By-Laws By-Laws effective at closing and through and after the transitional period Closing ................................................................. Not applicable .................................................. Disqualification .................................................... As currently written, the definition lists some, but not all, of the grounds for statutory disqualification contained in Section 3(a)(39) of the Exchange Act. Floor Member Governor ...................................... Not applicable .................................................. Independent Dealer/Insurance Affiliate Governor cprice-sewell on PROD1PC66 with NOTICES Term Not applicable .................................................. Means the closing of the consolidation of certain member firm regulatory functions of NYSE Regulation, Inc. and NASD. Means the definition that is contained in Section 3(a)(39) of the Exchange Act. The purpose of the amendment is to conform the By-Laws directly to the statutory provision that NASD is obligated to enforce, as well as to conform the By-Laws to any subsequent amendments to the statute. Means a member of the Board appointed as such who is a person associated with a member (or a firm in the process of becoming a member) which is a specialist or floor broker on the New York Stock Exchange trading floor. Means a member of the Board appointed as such who is a person associated with a member which is an independent contractor financial planning member firm or an insurance company, or an affiliate of such a member. 8 NASD will be filing a subsequent rule change to address the applicable eligibility proceedings for VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 persons subject to disqualification as a result of the proposed change in definition. PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 E:\FR\FM\26MRN1.SGM 26MRN1 14158 Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices Current By-Laws By-Laws effective at closing and through and after the transitional period Industry Governor or Industry committee member. Means a Governor (excluding the Chief Executive Officer of the NASD and the President of NASD Regulation) or committee member who: (1) Is or has served in the prior three years as an officer, director or employee of a broker or dealer, excluding an outside director or a director not engaged in the dayto-day management of a broker or dealer; (2) is an officer, director (excluding an outside director) or employee of an entity that owns more than ten percent of the equity of a broker or dealer, and the broker or dealer accounts for more than five percent of the gross revenues received by the consolidated entity; (3) owns more than five percent of the equity securities of any broker or dealer, whose investments in brokers or dealers exceed ten percent of his or her net worth, or whose ownership interest otherwise permits him or her to be engaged in the day-to-day management of a broker or dealer; (4) provides professional services to brokers or dealers, and such services constitute 20 percent or more of the professional revenues received by the Governor or committee member or 20 percent or more of the gross revenues received by the Governor’s or committee member’s firm or partnership; (5) provides professional services to a director, officer or employee of a broker, dealer or corporation that owns 50 percent or more of the voting stock of a broker or dealer, and such services relate to the director’s, officer’s or employee’s professional capacity and constitute 20 percent or more of the professional revenues received by the Governor or committee member or 20 percent or more of the gross revenues received by the Governor’s or committee member’s firm or partnership; or (6) has a consulting or employment relationship with or provides professional services to the NASD, NASD Regulation, NASD Dispute Resolution, or a market for which NASD provides regulation, or has had any such relationship or provided any such services at any time within the prior three years. Not applicable .................................................. Means the Floor Member Governor, the Independent Dealer/Insurance Affiliate Governor and the Investment Company Affiliate Governor and any other Governor (excluding the Chief Executive Officer of the New SRO and, during the Transitional Period, the Chief Executive Officer of NYSE Regulation, Inc.) or committee member who: (1) Is or has served in the prior year as an officer, director (other than as an independent director), employee or controlling person of a broker or dealer, or (2) has a consulting or employment relationship with or provides professional services to a self-regulatory organization registered under the Exchange Act, or has had any such relationship or provided any such services at any time within the prior year. Investment Company Affiliate Governor ............. Joint Public Governor .......................................... Not applicable .................................................. Large, Mid-Size and Small Firms ........................ cprice-sewell on PROD1PC66 with NOTICES Term Not applicable .................................................. Large Firm, Mid-Size Firm and Small Firm Governors. Not applicable .................................................. VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 Means a member of the Board appointed as such who is a person associated with a member which is an investment company (as defined in The Investment Company Act of 1940, as amended) or an affiliate of such a member. Means the one Public Governor to be appointed as such by the Board of Directors of NYSE Group, Inc. and the Board in office prior to the Closing jointly. Mean any broker or dealer admitted to membership in the New SRO which, at the time of determination, has 1–150, 151–499 or 500 or more registered persons, respectively. Mean members of the Board to be elected by Large, Mid-Size, and Small Firm members, respectively, provided, however, that in order to be eligible to serve, a Large Firm, Mid-Size Firm, and Small Firm Governor must be an Industry Governor and must be registered with a member which is a Large Firm, Mid-Size Firm, or Small Firm member, as the case may be. E:\FR\FM\26MRN1.SGM 26MRN1 Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices 14159 Term Current By-Laws By-Laws effective at closing and through and after the transitional period Large Firm Governor and Small Firm Governor Committees. Not applicable .................................................. Lead Governor .................................................... Not applicable .................................................. NASD Public Governors and NYSE Public Governors. Not applicable .................................................. NASD Group Committee ..................................... Not applicable .................................................. NYSE Group Committee ..................................... Not applicable. ................................................. Non-Industry Governor or Non-Industry committee member. Means a Governor (excluding the Chief Executive Officer and any other officer of the NASD, the President of NASD Regulation) or committee member who is: (1) A Public Governor or committee member; (2) an officer or employee of an issuer of securities listed on a market for which NASD provides regulation; (3) an officer or employee of an issuer of unlisted securities that are traded in the over-the-counter market; or (4) any other individual who would not be an Industry Governor or committee member. Means a Governor or committee member who has no material business relationship with a broker or dealer or the NASD, NASD Regulation, NASD Dispute Resolution, or a market for which NASD provides regulation. Means a committee of the Board comprised of all of the Large Firm Governors or Small Firm Governors, as the case may be. Means a member of the Board elected as such by the Board, provided, however, that any member of the Board who is concurrently serving as a member of the Board of Directors of NYSE Group, Inc. is not eligible to serve as the Lead Governor. Mean the five Public Governors to be appointed as such by the Board in office prior to the Closing and the five Public Governors to be appointed as such by the Board of Directors of NYSE Group, Inc., respectively, effective as of Closing. Means a committee of the Board comprised of the five Public Governors and the Independent Dealer/Insurance Affiliate Governor appointed as such by the Board in office prior to Closing, and the Small Firm Governors which were nominated for election as such by the Board in office prior to Closing, and in each case their successors. Means a committee of the Board comprised of the five Public Governors and the Floor Member Governor appointed as such by the Board of Directors of NYSE Group, Inc., and the Large Firm Governors which were nominated for election as such by the Board of Directors of NYSE Group, Inc., and in each case their successors. Not applicable. Public Governor or Public committee member ... cprice-sewell on PROD1PC66 with NOTICES Transitional Period .............................................. There also are certain other nonsubstantive changes reflected in the rule text. For example, each reference to ‘‘the NASD’’ or ‘‘NASD’’ in the NASD ByLaws will be replaced with ‘‘the Corporation’’ in contemplation of the change in the name of the corporation. In addition, each reference to the ‘‘Rules of the Association’’ in the NASD ByLaws will be replaced with the ‘‘Rules of the Corporation.’’ The effective date VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 Not applicable .................................................. of the proposed rule change will be the closing of the Transaction. Assuming SEC approval of the proposed rule change, corresponding changes will be made to NASD’s Certificate of Incorporation. The effective date of the corresponding changes to NASD’s Certificate of Incorporation also will be the closing of the Transaction. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 Means any Governor or committee member who is not the Chief Executive Officer of the New SRO or, during the Transitional Period, the Chief Executive Officer of NYSE Regulation, Inc., who is not an Industry Governor and who otherwise has no material business relationship with a broker or dealer or a self-regulatory organization registered under the Exchange Act, other than as a public director of such a self-regulatory organization. Means the period commencing on the date of the Closing and ending on the third anniversary of the date of the Closing. Proposed Changes to NASD Regulation By-Laws In 1996, based on recommendations of a committee appointed by the NASD Board, NASD formed its subsidiary NASD Regulation (in addition to the already existing Nasdaq) and adopted the Plan of Allocation and Delegation of Functions by NASD to Subsidiaries (‘‘Delegation Plan’’) to reflect its change E:\FR\FM\26MRN1.SGM 26MRN1 14160 Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices cprice-sewell on PROD1PC66 with NOTICES in corporate structure.9 In 2000, NASD created another subsidiary for its mediation and arbitration functions, NASD Dispute Resolution. Following the closing of the Transaction, the New SRO will evaluate the role and governance structure of the subsidiaries and the ongoing need for the Delegation Plan. At this time, the proposed rule change would make limited conforming changes to the NASD Regulation ByLaws solely to reflect the proposed governance structure of the New SRO Board. First, in light of the new proposed composition of the New SRO Board, the proposed rule change would amend Section 5.2 of the NASD Regulation ByLaws (Number of Members and Qualifications of the National Adjudicatory Council (‘‘NAC’’)) to eliminate the reference that the Chairman of the NAC shall serve as a Governor of the NASD Board for a oneyear term. Second, because the Chairman of the NAC may continue to serve as a Director of the NASD Regulation Board, the proposed rule change would eliminate the requirement in Section 4.3 (Qualifications) that only Governors of the NASD Board shall be eligible for election to the NASD Regulation Board. Finally, NASD proposes to amend the statement in Section 4.3 that provides that the CEO of NASD shall be an ex-officio nonvoting member of the NASD Regulation Board, to reflect that Ms. Schapiro will occupy both the position of CEO of the New SRO and the President of NASD Regulation. In particular, the proposed rule change would clarify that where the CEO of the New SRO also serves as President of NASD Regulation, then the person shall have all powers, including voting powers, granted to all other Directors pursuant to applicable law, the Restated Certificate of Incorporation, the Delegation Plan and the NASD Regulation By-Laws. The effective date of the proposed rule change will be the closing of the Transaction. 2. Statutory Basis NASD believes that the proposed rule change is consistent with the provisions of Section 15A of the Act, including Section 15A(b)(2) of the Act,10 in that it provides for the organization of the New SRO in a manner that will permit the New SRO to carry out the purposes of the Act, to comply with the Act, and to 9 On December 20, 2006, NASD eliminated its delegation of authority to Nasdaq under the Delegation Plan and effectuated complete separation with Nasdaq, including dissolution of NASD’s controlling share in Nasdaq. 10 15 U.S.C. 78o–3(b)(2). VerDate Aug<31>2005 15:30 Mar 23, 2007 Jkt 211001 enforce compliance by New SRO members and persons associated with members with the Act, the rules and regulations thereunder, New SRO rules and the federal securities laws. NASD further believes that the proposed rule change is consistent with Section 15A(b)(4) of the Act 11 in that the amendments are designed to assure a fair representation of the New SRO’s members in the selection of its Governors and administration of its affairs, as well as to comply with the public participant requirements of the Act. Moreover, firms that today are regulated by both NASD and NYSE Regulation will benefit from the elimination of the current duplication of regulatory review of these firms. The Transaction, as reflected in the proposed rule change, will further benefit members as it will streamline the broker-dealer regulatory system, combine technologies and permit the establishment of a single set of rules and group examiners with complementary areas of expertise in a single organization—all of which will serve to enhance oversight of U.S. securities firms and help to ensure investor protection. B. Self-Regulatory Organization’s Statement on Burden on Competition NASD does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) As the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which NASD consents, the Commission will: (A) By order approve such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. 11 15 PO 00000 IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASD–2007–023 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASD–2007–023. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room. Copies of such filing also will be available for inspection and copying at the principal office of NASD. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NASD–2007–023 and should be submitted on or before April 16, 2007. U.S.C. 78o–3(b)(4). Frm 00089 Fmt 4703 Sfmt 4703 E:\FR\FM\26MRN1.SGM 26MRN1 Federal Register / Vol. 72, No. 57 / Monday, March 26, 2007 / Notices For the Commission, by the Division of Market Regulation, pursuant to delegated authority.12 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–5422 Filed 3–23–07; 8:45 am] Percent Other (Including Non-Profit Organizations) With Credit Available Elsewhere ................................. Businesses and Non-Profit Organizations Without Credit Available Elsewhere ......................... The number assigned to this disaster for physical damage is ..... BILLING CODE 8010–01–P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #10829] Iowa Disaster #IA–00006 Small Business Administration. Notice. AGENCY: ACTION: This is a Notice of the Presidential declaration of a major disaster for Public Assistance Only for the State of Iowa ( FEMA—1688—DR), dated 03/14/2007. Incident: Severe Winter Storms. Incident Period: 02/23/2007 through 03/02/2007. Effective Date: 03/14/2007. Physical Loan Application Deadline Date: 05/14/2007. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street, SW., Suite 6050, Washington, DC 20416. SUPPLEMENTARY INFORMATION: Notice is hereby given that as a result of the President’s major disaster declaration on 03/14/2007, Private Non-Profit organizations that provide essential services of a governmental nature may file disaster loan applications at the address listed above or other locally announced locations. The following areas have been determined to be adversely affected by the disaster: Primary Counties: Benton, Black Hawk, Boone, Bremer, Buchanan, Butler, Calhoun, Cedar, Chickasaw, Clinton, Des Moines, Fayette, Floyd, Franklin, Greene, Grundy, Hamilton, Hardin, Henry, Howard, Humboldt, Iowa, Jackson, Jasper, Jefferson, Johnson, Jones, Keokuk, Lee, Linn, Louisa, Marion, Marshall, Mitchell, Muscatine, Pocahontas, Poweshiek, Story, Tama, Van Buren, Wapello, Washington, Winnebago, Winneshiek, Worth, Wright. The Interest Rates are: cprice-sewell on PROD1PC66 with NOTICES SUMMARY: 12 17 CFR 200.30–3(a)(12). VerDate Aug<31>2005 15:30 Mar 23, 2007 DEPARTMENT OF STATE [Public Notice 5729] 5.250 4.000 10829 (Catalog of Federal Domestic Assistance Number: 59008) Herbert L. Mitchell, Associate Administrator for Disaster Assistance. [FR Doc. E7–5428 Filed 3–23–07; 8:45 am] BILLING CODE 8025–01–P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #10817] Oregon Disaster Number OR–00017 Small Business Administration. Amendment 1. AGENCY: ACTION: SUMMARY: This is an amendment of the Presidential declaration of a major disaster for Public Assistance Only for the State of Oregon (FEMA–1683–DR), dated 02/22/2007. Incident: Severe Winter Storm and Flooding. Incident Period: 12/14/2006 through 12/15/2006. Effective Date: 03/16/2007. Physical Loan Application Deadline Date: 04/23/2007. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street, SW., Suite 6050, Washington, DC 20416. SUPPLEMENTARY INFORMATION: The notice of the President’s major disaster declaration for Private Non-Profit organizations in the State of Oregon, dated 02/22/2007, is hereby amended to include the following areas as adversely affected by the disaster. Primary Counties: Wasco. All other information in the original declaration remains unchanged. (Catalog of Federal Domestic Assistance Number: 59008) Herbert L. Mitchell, Associate Administrator for Disaster Assistance. [FR Doc. E7–5427 Filed 3–23–07; 8:45 am] Culturally Significant Objects Imported for Exhibition Determinations: ‘‘Edward Hopper’’ Summary: Notice is hereby given of the following determinations: Pursuant to the authority vested in me by the Act of October 19, 1965 (79 Stat. 985; 22 U.S.C. 2459), Executive Order 12047 of March 27, 1978, the Foreign Affairs Reform and Restructuring Act of 1998 (112 Stat. 2681, et seq.; 22 U.S.C. 6501 note, et seq.), Delegation of Authority No. 234 of October 1, 1999, Delegation of Authority No. 236 of October 19, 1999, as amended, and Delegation of Authority No. 257 of April 15, 2003 [68 FR 19875], I hereby determine that the objects to be included in the exhibition ‘‘Edward Hopper’’, imported from abroad for temporary exhibition within the United States, are of cultural significance. The objects are imported pursuant to loan agreements with the foreign owners or custodians. I also determine that the exhibition or display of the exhibit objects at the Museum of Fine Arts, Boston, Massachusetts, beginning on or about May 6, 2007, until on or about August 19, 2007, the National Gallery of Art, Washington, DC, beginning on or about September 16, 2007, until on or about January 21, 2008, and the Art Institute of Chicago, Chicago, Illinois, beginning on or about February 16, 2008, until on or about May 11, 2008, and at possible additional venues yet to be determined, is in the national interest. Public Notice of these Determinations is ordered to be published in the Federal Register. For Further Information Contact: For further information, including a list of the exhibit objects, contact Julianne Simpson, Attorney-Adviser, Office of the Legal Adviser, U.S. Department of State (telephone: (202) 453–8050). The address is U.S. Department of State, SA–44, 301 4th Street, SW., Room 700, Washington, DC 20547–0001. Dated: March 20, 2007. C. Miller Crouch, Principal Deputy Assistant Secretary for Educational and Cultural Affairs Department of State. [FR Doc. E7–5485 Filed 3–23–07; 8:45 am] BILLING CODE 4710–05–P BILLING CODE 8025–01–P Jkt 211001 PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 14161 E:\FR\FM\26MRN1.SGM 26MRN1

Agencies

[Federal Register Volume 72, Number 57 (Monday, March 26, 2007)]
[Notices]
[Pages 14149-14161]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-5422]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55495; File No. SR-NASD-2007-023]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change To Amend the 
By-Laws of NASD To Implement Governance and Related Changes To 
Accommodate the Consolidation of the Member Firm Regulatory Functions 
of NASD and NYSE Regulation, Inc.

March 20, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on March 19, 2007, the National Association of 
Securities Dealers, Inc. (``NASD'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by NASD. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend the By-Laws of NASD (``NASD By-Laws'') 
to implement governance and related changes to accommodate the 
consolidation of the member firm regulatory functions of NASD and NYSE 
Regulation, Inc. (``NYSE Regulation''). The proposed rule change also 
would make limited conforming changes to the By-Laws of NASD 
Regulation, Inc. (``NASD Regulation By-Laws'').
    The text of the proposed rule change is available on the NASD's Web 
site (http://www.nasd.com), at the principal office of NASD, and at the 
Commission's Public Reference Room. The text of Exhibit 5 of the 
proposed rule change is also available on the Commission's Web site 
(http://www.sec.gov).

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASD has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background and Reasons for the Transaction
    The securities industry--both domestically and internationally--is 
in the midst of dramatic change. As the industry changes, it has become 
clear that the self-regulatory organization (``SRO'') model must be 
adapted to ensure efficient and effective regulation. At the moment, 
both NASD and NYSE Regulation oversee the activities of U.S.-based 
broker-dealers doing business with the public, approximately 170 of 
which are regulated by both organizations. The result is a duplicative, 
sometimes conflicting system that makes inefficient use of resources 
and, as such, can be detrimental to the ultimate goal of investor 
protection.
    NASD has long supported the idea of one SRO having responsibility 
for all member firm regulation.\3\ At the same time, the SEC, Congress, 
securities firms, and independent observers have long encouraged 
greater efficiencies, clarity and cost savings in the regulation of 
America's financial markets. For these reasons, NASD and NYSE 
Regulation joined together proactively to design a system that would 
better meet the needs of today's investors and securities firms.
---------------------------------------------------------------------------

    \3\ See NASD's comment letter dated March 15, 2005 in response 
to the SEC's Concept Release Concerning Self-Regulation, Securities 
Exchange Act Release No. 50700 (November 18, 2004), 69 FR 71256 
(December 8, 2004) (File No. S7-40-04).
---------------------------------------------------------------------------

    With the support and encouragement of the SEC, NASD and NYSE Group, 
Inc. (``NYSE Group'') representatives began meeting in June 2006 to 
discuss options for changes to the self-regulatory system. A 
determination was made that the scope of the discussions should be 
limited to eliminating redundant member regulation and not to combine 
the market regulatory responsibilities of NASD and NYSE Regulation.
    On November 28, 2006, NASD and the NYSE Group announced the plan to 
consolidate their member regulation operations into a combined 
organization that will be the sole U.S. private-sector provider of 
member firm regulation for securities firms that do business with the 
public (the ``Transaction'').\4\ This consolidation will streamline the 
broker-dealer regulatory system, combine technologies, permit the 
establishment of a single set of rules and group examiners with 
complementary areas of expertise in a single organization--all of which 
will serve to enhance oversight of U.S. securities firms and help 
ensure investor protection. Moreover, the new organization will be 
committed to reducing regulatory costs and burdens for firms of all 
sizes through greater regulatory efficiency.
---------------------------------------------------------------------------

    \4\ At the closing of the Transaction, NASD will adopt a new 
corporate name. The proposed rule change refers to the newly named 
entity as the ``New SRO.''
---------------------------------------------------------------------------

    The goals of the consolidation plan are to:
     Establish a new organization that will be the single SRO 
for all securities firms doing business with the public in the U.S.;
     Build and sustain the confidence critical to the operation 
of vibrant capital markets;
     Increase efficient, effective, and consistent regulation 
of securities firms;
     Provide cost savings to securities firms of all sizes; and
     Strengthen investor protection and market integrity.

None of NASD's current functions and activities will be eliminated as a 
result of the Transaction. The new organization will be responsible 
for:
     Regulatory oversight of all securities firms that do 
business with the public;
     Professional training, testing and licensing of registered 
persons;
     Arbitration and mediation;
     Market regulation by contract for The Nasdaq Stock Market, 
Inc. (``Nasdaq''), the American Stock Exchange LLC, and the 
International Securities Exchange, LLC; and
     Industry utilities, such as Trade Reporting Facilities and 
other over-the-counter operations.
    The consolidation plan addresses key issues raised in the SEC's 
2004 Concept

[[Page 14150]]

Release Concerning Self-Regulation: (1) The inherent conflicts of 
interest between SRO regulatory operations and members, market 
operations, issuers and stockholders; (2) the costs and inefficiencies 
of multiple SROs, arising from multiple SRO rulebooks, inspection 
regimes and staff; and (3) the funding SROs have available for 
regulatory operations and the manner in which SROs allocate revenue to 
regulatory operations.\5\
---------------------------------------------------------------------------

    \5\ See supra note 3.
---------------------------------------------------------------------------

    The closing of the Transaction and the consolidation of the member 
firm regulatory functions of the two organizations is subject to the 
SEC's approval of this proposed rule change, the execution of 
definitive agreements between NASD and NYSE Group and obtaining certain 
additional regulatory approvals.\6\
---------------------------------------------------------------------------

    \6\ On March 7, 2007, NASD and NYSE Group filed notification 
reports with the Department of Justice and the Federal Trade 
Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 
1976. The waiting period for such a filing will terminate 30 
calendar days after the filing, unless the waiting period is 
extended. NASD believes that the completion of the Transaction will 
not violate the antitrust laws. NASD also has received a favorable 
ruling by the Internal Revenue Service that the Transaction will not 
affect the tax-exempt status of NASD or NASD Regulation. NASD and 
NYSE Group will seek to satisfy all regulatory filing obligations 
and observe any required waiting periods prior to the completion of 
the Transaction.
---------------------------------------------------------------------------

Composition of the New SRO Board of Governors During the Transitional 
Period
    The proposed rule change will implement the governance changes at 
the combined organization, including a Board structure that balances 
public and industry representation, and designates certain governor 
seats to represent member firms of various sizes. As further described 
below, the new governance structure guarantees industry participation 
that provides for fair and balanced member representation on the Board.
    For a transitional period commencing on the date of closing of the 
Transaction and ending on the third anniversary of the date of closing 
(the ``Transitional Period''), the New SRO Board of Governors (``New 
SRO Board'') will consist of 23 governors as follows: (1) Eleven of the 
governors will be ``Public Governors''; (2) ten of the governors will 
be ``Industry Governors''; and (3) two of the governors will initially 
be Richard G. Ketchum, Chief Executive Officer (``CEO'') of NYSE 
Regulation and Mary L. Schapiro, CEO of NASD. Mr. Ketchum will serve as 
Non-Executive Chairman of the New SRO for a term of three years. Ms. 
Schapiro will serve as CEO of the New SRO.
    The eleven Public Governors will have no material business 
relationship with a broker or dealer or an SRO registered under the 
Exchange Act.
    Of the ten Industry Governors, (1) Three will be registered with a 
member that employs 500 or more registered persons (the ``Large Firm 
Governors''); (2) one will be registered with a member that employs at 
least 151 and no more than 499 registered persons (the ``Mid-Size Firm 
Governor''); (3) three will be registered with a member that employs at 
least one and no more than 150 registered persons (the ``Small Firm 
Governors''); (4) one will be associated with a floor member of the New 
York Stock Exchange (the ``Floor Member Governor''); (5) one will be 
associated with an independent dealer or insurance affiliate (the 
``Independent Dealer/Insurance Affiliate Governor''); and (6) one will 
be associated with an investment company affiliate (the ``Investment 
Company Affiliate Governor'').
    The Industry Governors and Public Governors will be appointed or 
nominated during the Transitional Period as follows:
     The three Small Firm Governors will be nominated by the 
NASD Board and elected by members that have at least one and no more 
than 150 registered persons; provided that members of that size also 
can nominate such candidates.
     The one Mid-Size Firm Governor will be nominated jointly 
by the Board of Directors of NYSE Group (``NYSE Group Board'') and the 
NASD Board and elected by members that have at least 151 and no more 
than 499 registered persons; provided that members of that size also 
can nominate such candidates.
     The three Large Firm Governors will be nominated by the 
NYSE Group Board and elected by members that have 500 or more 
registered persons; provided that members of that size also can 
nominate such candidates.
     Five Public Governors will be appointed by the NYSE Group 
Board.
     Five Public Governors will be appointed by the NASD Board.
     One Public Governor will be appointed jointly by the NYSE 
Group Board and the NASD Board.
     The one Floor Member Governor will be appointed by the 
NYSE Group Board.
     The one Independent Dealer/Insurance Affiliate Governor 
will be appointed by the NASD Board.
     The one Investment Company Affiliate Governor will be 
appointed jointly by the NYSE Group Board and the NASD Board.
    Effective as of closing of the Transaction, the NYSE Group Board 
and the NASD Board in office prior to the closing will appoint the 
Public Governors and Industry Governors they, either individually or 
jointly, have the power to appoint. The Public Governors will hold 
office for the Transitional Period. The three Large Firm Governors, 
three Small Firm Governors and one Mid-Size Governor will be elected as 
Governors at the first annual meeting of members following the closing, 
which is expected to be held within ninety days after closing of the 
Transaction and will hold office until the first annual meeting of 
members following the Transitional Period. During the interim period 
from closing of the Transaction until the annual meeting, these seven 
seats will be filled by three interim Industry Governors appointed by 
the NASD Board prior to the closing of the Transaction from industry 
governors currently on the NASD Board, three interim Industry Governors 
appointed by the NYSE Group Board and one interim Industry Governor 
jointly appointed by the NYSE Group Board and the NASD Board prior to 
the closing of the Transaction.
    As a result of the NASD By-Law amendments, members will no longer 
have the ability to vote for all New SRO Board candidates in elections, 
but will have an opportunity to vote on designated seats on the New SRO 
Board. Specifically, firms will vote for industry nominees that are 
similar in size to their own firm. This means that small firms and 
large firms will vote for candidates running for the seats reserved for 
their firm size and the mid-sized firms will likewise vote for the mid-
sized firm seat. All other New SRO Board seats will be appointed as 
described above. All members will continue to have the ability to vote 
on any future amendments to the New SRO By-Laws, as well as in district 
elections.
    The New SRO Board will have a Governor who will preside over 
executive sessions of the New SRO Board in the event the Non-Executive 
Chairman is recused (``Lead Governor''). The Lead Governor will be 
selected by the New SRO Board, after consultation with the CEO. The 
Board, the CEO, the Non-Executive Chairman and the Lead Governor will 
have the authority to call meetings of the New SRO Board. Both the CEO 
and Non-Executive Chairman, and for matters from which the CEO and Non-
Executive Chairman are recused from considering, the Lead Governor, 
will have the authority to place items on the New SRO Board agendas.

[[Page 14151]]

Governor Vacancies During the Transitional Period
    In the event of a vacancy in the governor position held by the CEO 
of NYSE Regulation during the Transitional Period, the then CEO of NYSE 
Regulation will serve as a governor for the remainder of the 
Transitional Period. If the CEO of NYSE Regulation as of closing of the 
Transaction ceases to occupy the office of Non-Executive Chairman for 
any reason during the Transitional Period, then his successor as Non-
Executive Chairman shall be selected by and from a committee comprised 
of the Governors that were appointed or nominated by the NYSE Group 
Board, with the exception that those Governors that also serve as NYSE 
Group directors may not become Non-Executive Chairman nor may his 
successor as CEO of NYSE Regulation become Non-Executive Chairman.
    In the event of any vacancy among the Large Firm Governors, the 
Mid-Size Firm Governor, or the Small Firm Governors during the 
Transitional Period, such vacancy shall only be filled by, and 
nominations for persons to fill such vacancy shall be made by, a 
committee of the New SRO Board composed of the other Governors 
appointed or nominated by the NYSE Group Board in the case of a Large 
Firm Governor vacancy; such vacancy shall only be filled by the Board, 
and nominations for persons to fill such vacancy shall be made by the 
Nominating Committee in the case of a Mid-Size Firm Governor vacancy; 
or such vacancy shall only be filled by, and nominations for persons to 
fill such vacancy shall be made by, a committee of the New SRO Board 
composed of the other Governors appointed or nominated by the NASD 
Board in the case of a Small Firm Governor vacancy. In the event the 
remaining term of office of any such governor is more than twelve 
months, nominations shall be made as set forth above, but such vacancy 
will be filled by the New SRO members entitled to vote on such governor 
position at a meeting of such members called to fill the vacancy.
    In the event of any vacancy among the Floor Member Governor, the 
Investment Company Affiliate Governor or the Independent Dealer/
Insurance Affiliate Governor during the Transitional Period, such 
vacancy shall only be filled by, and nominations for persons to fill 
such vacancy shall be made by, a committee of the New SRO Board 
composed of the other Governors appointed or nominated by the NYSE 
Group Board in the case of a Floor Member Governor vacancy; such 
vacancy shall only be filled by the New SRO Board, and nominations for 
persons to fill such vacancy shall be made by the Nominating Committee 
in the case of an Investment Company Affiliate Governor vacancy; or 
such vacancy shall only be filled by, and nominations for persons to 
fill such vacancy shall be made by, a committee of the New SRO Board 
composed of other Governors appointed or nominated by the NASD Board in 
the case of an Independent Dealer/Insurance Affiliate Governor vacancy.
    In the event of any vacancy among those Public Governors appointed 
by the NYSE Group Board, such vacancy shall only be filled by, and 
nominations for persons to fill such vacancy shall be made by, a 
committee of the New SRO Board composed of the other Governors 
appointed or nominated by the NYSE Group Board. In the event of any 
vacancy among those Public Governors appointed by the NASD Board, such 
vacancy shall only be filled by, and nominations for persons to fill 
such vacancy shall be made by, a committee of the New SRO Board 
comprised of the other Governors appointed or nominated by the NASD 
Board. In the event of any vacancy of the Public Governor position 
jointly appointed by the NYSE Group Board and the NASD Board, such 
vacancy shall only be filled by the New SRO Board, and nominations for 
persons to fill such vacancy shall be made by the Nominating Committee.
Composition of the New SRO Board After the Transitional Period
    Upon the expiration of the Transitional Period, the term of office 
of the CEO of NYSE Regulation as a member of the New SRO Board will 
automatically terminate and the authorized number of members of the New 
SRO Board will be reduced by one.\7\
---------------------------------------------------------------------------

    \7\ Under Article VII, Section 4 of the New SRO By-Laws 
(Composition and Qualification of the Board), the total number of 
Governors is determined by the Board of Governors, with such number 
being no fewer than 16 nor more than 25 Governors. The number of 
Public Governors must exceed the number of Industry Governors.
---------------------------------------------------------------------------

    As of the first annual meeting of members following the 
Transitional Period, the Large Firm Governors, the Mid-Size Firm 
Governor and the Small Firm Governors will be elected into three 
classes. The composition of the classes will be arranged as follows:
     The first class, being comprised of one Large Firm 
Governor and one Small Firm Governor, will be elected for a term of 
office expiring at the first succeeding annual meeting of members;
     The second class, being comprised of one Large Firm 
Governor, one Mid-Size Firm Governor and one Small Firm Governor, will 
be elected for a term of office expiring at the second succeeding 
annual meeting of members; and
     The third class, being comprised of one Large Firm 
Governor and one Small Firm Governor, will be elected for a term of 
office expiring at the third succeeding annual meeting of members.
    While these classes are designed to ensure staggered board seats, 
at no time will there be less than ten Industry Governor positions on 
the New SRO Board. At each annual election following the first annual 
meeting of members after the Transitional Period, Large Firm Governors, 
Small Firm Governors, and Mid-Size Firm Governors will be elected for a 
term of three years to replace those whose terms expire.
    As of the first annual meeting of members following the 
Transitional Period, the Public Governors, the Floor Member Governor, 
the Independent Dealer/Insurance Affiliate Governor, and the Investment 
Company Affiliate Governor (the ``Appointed Governors'') will be 
divided by the New SRO Board into three classes, as equal in number as 
possible, with the first class holding office until the first 
succeeding annual meeting of members, the second class holding office 
until the second succeeding annual meeting of members, and the third 
class holding office until the third succeeding annual meeting of 
members. Each class will initially contain as equivalent a number as 
possible of Appointed Governors who were members of the New SRO Board 
appointed or nominated by the NYSE Group Board or are successors to 
such governor positions, on the one hand, and Appointed Governors who 
were members of the New SRO Board appointed or nominated by the NASD 
Board or are successors to such governor positions, on the other hand, 
to the extent the New SRO Board determines such persons are to remain 
Governors after the Transitional Period. At each annual election 
following the first annual meeting of members following the 
Transitional Period, Appointed Governors will be appointed by the New 
SRO Board for a term of three years to replace those whose terms 
expire.
Role and Composition of the Nominating Committee
    The Nominating Committee will be a committee of the New SRO Board 
and will replace the current National Nominating Committee. For the 
first

[[Page 14152]]

annual meeting following the closing of the Transaction, nominations 
for the seven elected industry seats will not be made by the Nominating 
Committee, but instead by the NASD Board and the NYSE Group Board as 
constituted prior to the closing of the Transaction. In addition, prior 
to the closing, the NASD Board and the NYSE Group Board will identify 
and appoint persons for the eleven public seats and three remaining 
industry seats.
    During the Transitional Period, the Nominating Committee will be 
responsible solely for nominating persons to fill vacancies in governor 
seats for which the full New SRO Board has the authority to fill. 
Following the Transitional Period, the Nominating Committee will be 
responsible for nominating persons for appointment or election to the 
New SRO Board, as well as nominating persons to fill vacancies in 
appointed or elected governor seats.
    During the Transitional Period, members of the Nominating Committee 
will be appointed jointly by the New SRO CEO and the CEO of NYSE 
Regulation as of closing of the Transaction (or his duly appointed 
successor as Chair of the New SRO Board), subject to ratification of 
the appointees by the New SRO Board. Following the Transitional Period, 
the composition of the Nominating Committee will be determined by the 
New SRO Board. At all times, the number of Public Governors on the 
Nominating Committee must equal or exceed the number of Industry 
Governors on the Nominating Committee. In addition, the Nominating 
Committee must at all times be comprised of a number of governors that 
is a minority of the entire New SRO Board. The New SRO CEO may not be a 
member of the Nominating Committee.

Proposed Changes and Comparison to Current NASD By-Laws

    The following chart summarizes the material proposed changes as 
compared to the current NASD By-Laws and the timing of their 
effectiveness. The following is only a summary; the text of the 
proposed rule change is available on the NASD's Web site (http://
www.nasd.com), at the principal office of NASD, and at the Commission's 
Public Reference Room. The text of Exhibit 5 of the proposed rule 
change is also available on the Commission's Web site (http://
www.sec.gov).

----------------------------------------------------------------------------------------------------------------
                                                                By-Laws effective at    By-Laws effective at the
              Topic                     Current By-Laws          closing and for the        expiration of the
                                                                 transitional period       transitional period
----------------------------------------------------------------------------------------------------------------
Composition and Qualification of   The Board consists of no   As of Closing, and for    Same as By-Laws for the
 the Board.                         fewer than 15 nor more     the Transitional          Transitional Period,
                                    than 25 Governors,         Period, the Board         except that: (i) The
                                    comprising (i) The Chief   consists of 23            Chief Executive Officer
                                    Executive Officer of the   authorized members,       of NYSE Regulation,
                                    NASD, (ii) if the Board    consisting of (i) The     Inc. is no longer a
                                    of Governors determines,   Chief Executive Officer   Governor; (ii) the
                                    from time to time, in      of the NASD, (ii) the     total number of
                                    its sole discretion,       Chief Executive Officer   Governors is determined
                                    that the appointment of    of NYSE Regulation,       by the Board of
                                    a second officer of the    Inc., (iii) eleven        Governors, with such
                                    NASD to the Board of       Public Governors, (iv)    number being no fewer
                                    Governors is advisable,    a Floor Member            than 16, nor more than
                                    a second officer of the    Governor, an              25 and (iii) the number
                                    NASD, (iii) the            Independent Dealer/       of Public Governors is
                                    President of NASD          Insurance Affiliate       determined by the Board
                                    Regulation, (iv) the       Governor and an           of Governors, provided
                                    Chair of the National      Investment Company        such number must exceed
                                    Adjudicatory Council and   Affiliate Governor and    the number of Industry
                                    (v) no fewer than 12 and   (v) three Small Firm      Governors.
                                    no more than 22            Governors, one Mid-Size
                                    Governors elected by the   Firm Governor and three
                                    members of the NASD. The   Large Firm Governors;
                                    Governors elected by the   provided, however that
                                    members of the NASD        the Board will not
                                    include a representative   include such Small Firm
                                    of an issuer of            Governors, Mid-Size
                                    investment company         Firm Governor or Large
                                    shares or an affiliate     Firm Governors, but
                                    of such an issuer, a       rather will include
                                    representative of an       three persons, who
                                    insurance company, a       immediately prior to
                                    representative of a        the Closing are
                                    national retail firm, a    Industry Governors,
                                    representative of a        selected by the Board
                                    regional retail or         in office prior to the
                                    independent financial      Closing, three persons,
                                    planning member firm, a    who immediately prior
                                    representative of a firm   to the Closing
                                    that provides clearing     qualified as Industry
                                    services to other NASD     Governors pursuant to
                                    members, and a             the By-Laws in
                                    representative of an       existence prior to the
                                    NASD member having not     Closing, selected by
                                    more than 150 registered   the Board of Directors
                                    persons. The number of     of NYSE Group, Inc.,
                                    Non-Industry Governors     and one person, who
                                    must exceed the number     immediately prior to
                                    of Industry Governors.     the Closing qualified
                                    If the number of           as an Industry Governor
                                    Industry and Non-          pursuant to the By-Laws
                                    Industry Governors is 13-  in existence prior to
                                    15, the Board must         the Closing, selected
                                    include at least four      by the Board of
                                    Public Governors. If the   Directors of NYSE
                                    number of Industry and     Group, Inc. and the
                                    Non-Industry Governors     Board of Governors in
                                    is 16-17, the Board must   office prior to the
                                    include at least five      Closing jointly, until
                                    Public Governors. If the   the election of such
                                    number of Industry and     Small Firm Governors,
                                    Non-Industry Governors     Mid-Size Firm Governor
                                    is 18-23, the Board must   and Large Firm
                                    include at least six       Governors at the first
                                    Public Governors.          annual meeting of
                                                               members following the
                                                               Closing. [NOTE: To
                                                               allow for the
                                                               possibility of a
                                                               contested election, the
                                                               nominees for the Small
                                                               Firm Governor, Mid-Size
                                                               Firm Governor or Large
                                                               Firm Governor will be
                                                               voted upon at an annual
                                                               meeting of members
                                                               which shall be held as
                                                               soon as practicable
                                                               after the closing of
                                                               the Transaction and is
                                                               expected to be held
                                                               within ninety days of
                                                               the closing of the
                                                               Transaction.].

[[Page 14153]]

 
Term of Office of Governors......  The Chief Executive        The Chief Executive       The Chief Executive
                                    Officer and, if            Officer serves as a       Officer serves as a
                                    appointed, the second      Governor until a          Governor until a
                                    officer of the NASD, and   successor is elected,     successor is elected,
                                    the President of NASD      or until death,           or until death,
                                    Regulation serve as        resignation or removal.   resignation or removal.
                                    Governors until a         The Chief Executive       Public Governors and the
                                    successor is elected, or   Officer of NYSE           Floor Member Governor,
                                    until death, resignation   Regulation, Inc. as of    the Independent Dealer/
                                    or removal.                Closing serves as a       Insurance Affiliate
                                   The Chair of the National   Governor during the       Governor and the
                                    Adjudicatory Council       Transitional Period,      Investment Company
                                    serves as a Governor for   until death,              Affiliate Governor (the
                                    a term of one year, or     resignation or removal.   ``Appointed
                                    until a successor is      Effective as of Closing,   Governors'') are
                                    duly elected and           the Board of Directors    appointed by the Board.
                                    qualified, or until        of NYSE Group, Inc.      As of the first annual
                                    death, resignation,        appoints the NYSE         meeting of members
                                    disqualification or        Public Governors, the     following the
                                    removal.                   Board in office prior     Transitional Period,
                                   The Governors elected by    to the Closing appoints   the Appointed Governors
                                    the members of the NASD    the NASD Public           are divided by the
                                    are divided into three     Governors and the Board   Board into three
                                    classes and hold office    of Directors of NYSE      classes, as equal in
                                    for a term of no more      Group, Inc. and the       number as possible,
                                    than three years, such     Board in office prior     with the first class
                                    term being fixed by the    to the Closing jointly    holding office until
                                    Board at the time of the   appoint the Joint         the first succeeding
                                    nomination or              Public Governor.          annual meeting of
                                    certification of each     Effective as of Closing,   members, the second
                                    such Governor, or until    the Board of Directors    class holding office
                                    a successor is duly        of NYSE Group, Inc.       until the second
                                    elected and qualified,     appoints the Floor        succeeding meeting of
                                    or until death,            Member Governor, the      members and the third
                                    resignation,               Board of Governors in     class holding office
                                    disqualification or        office prior to the       until the third
                                    removal.                   Closing appoints the      succeeding annual
                                                               Independent Dealer/       meeting of members, or
                                                               Insurance Affiliate       until a successor is
                                                               Governor and the Board    duly appointed and
                                                               of Directors of NYSE      qualified, or until
                                                               Group, Inc. and the       death, resignation,
                                                               Board of Governors in     disqualification or
                                                               office prior to the       removal. Each class
                                                               Closing jointly appoint   initially contains as
                                                               the Investment Company    equivalent a number as
                                                               Affiliate Governor.       possible of Appointed
                                                              The Public Governors and   Governors who were
                                                               the Floor Member          members of the NYSE
                                                               Governor, the             Group Committee during
                                                               Investment Company        the Transitional Period
                                                               Affiliate Governor and    or are successors to
                                                               the Independent Dealer/   such Governor
                                                               Insurance Affiliate       positions, on the one
                                                               Governor appointed in     hand, and Appointed
                                                               accordance with the       Governors who were
                                                               preceding paragraphs      members of the NASD
                                                               hold office for the       Group Committee during
                                                               Transitional Period, or   the Transitional Period
                                                               until death,              or are successors to
                                                               resignation,              such Governor
                                                               disqualification or       positions, on the other
                                                               removal.                  hand, to the extent the
                                                              Three Large Firm           Board determines such
                                                               Governors, three Small    persons are to remain
                                                               Firm Governors and one    Governors after the
                                                               Mid-Size Governor are     Transitional Period. At
                                                               elected as Governors at   each annual election
                                                               the first annual          following the first
                                                               meeting of members        annual meeting of
                                                               following the Closing     members following the
                                                               (the ``Initial Member     Transitional Period,
                                                               Elected Governors'').     Appointed Governors are
                                                               The Initial Member        appointed by the Board
                                                               Elected Governors hold    for a term of three
                                                               office until the first    years to replace those
                                                               annual meeting of         whose terms expire.
                                                               members following the    As of the first annual
                                                               Transitional Period, or   meeting of members
                                                               until a successor is      following the
                                                               duly elected and          Transitional Period,
                                                               qualified, or until       the Large Firm
                                                               death, resignation,       Governors, the Mid-Size
                                                               disqualification or       Firm Governor and the
                                                               removal.                  Small Firm Governors
                                                              Upon the expiration of     are divided into three
                                                               the Transitional          classes, as equal in
                                                               Period, the term of       number as possible,
                                                               office of the Chief       with the first class,
                                                               Executive Officer of      being comprised of one
                                                               NYSE Regulation, Inc.     Large Firm Governor and
                                                               as a member of the        one Small Firm
                                                               Board automatically,      Governor, holding
                                                               and without any further   office until the first
                                                               action, terminates,       succeeding annual
                                                               such person no longer     meeting of members, the
                                                               is a member of the        second class, being
                                                               Board and the             comprised of one Large
                                                               authorized number of      Firm Governor, one Mid-
                                                               members of the Board      Size Firm Governor and
                                                               automatically is          one Small Firm
                                                               reduced by one.           Governor, holding
                                                                                         office until the second
                                                                                         succeeding annual
                                                                                         meeting of members and
                                                                                         the third class, being
                                                                                         comprised of one Large
                                                                                         Firm Governor and one
                                                                                         Small Firm Governor,
                                                                                         holding office until
                                                                                         the third succeeding
                                                                                         annual meeting of
                                                                                         members, or until a
                                                                                         successor is duly
                                                                                         elected and qualified,
                                                                                         or until death,
                                                                                         resignation,
                                                                                         disqualification or
                                                                                         removal. At each annual
                                                                                         election following the
                                                                                         first annual meeting of
                                                                                         members following the
                                                                                         Transitional Period,
                                                                                         Large Firm Governors,
                                                                                         Small Firm Governors
                                                                                         and the Mid-Size Firm
                                                                                         Governor are elected
                                                                                         for a term of three
                                                                                         years to replace those
                                                                                         whose terms expire.

[[Page 14154]]

 
Filling of Vacancies.............  If an elected Governor     In the event the Chief    In the event of any
                                    position becomes vacant,   Executive Officer of      vacancy among the Large
                                    whether because of         NYSE Regulation, Inc.     Firm Governors, the Mid-
                                    death, disability,         as of Closing no longer   Size Firm Governor or
                                    disqualification,          serves as a Governor      the Small Firm
                                    removal or resignation,    during the Transitional   Governors, such vacancy
                                    the National Nominating    Period, the then Chief    is only filled by the
                                    Committee nominates, and   Executive Officer of      Large Firm Governor
                                    the Board elects by        NYSE Regulation, Inc.     Committee in the case
                                    majority vote of the       serves as a Governor      of a Large Firm
                                    remaining Governors then   for the remainder of      Governor vacancy, the
                                    in office, a person        the Transitional          Board in the case of a
                                    satisfying the             Period, until death,      Mid-Size Firm Governor
                                    classification             resignation or removal.   vacancy or the Small
                                    (Industry, Non-Industry   In the event of any        Firm Governor Committee
                                    or Public Governor) for    vacancy among the NYSE    in the case of a Small
                                    the governorship to fill   Public Governors, the     Firm Governor vacancy;
                                    such vacancy, except       Joint Public Governor     provided, however, that
                                    that if the remaining      or NASD Public            in the event the
                                    term of office for the     Governors during the      remaining term of
                                    vacant Governor position   Transitional Period,      office of any Large
                                    is not more than six       such vacancy is only      Firm, Mid-Size Firm or
                                    months, no replacement     filled by, and            Small Firm Governor
                                    is required. If the        nominations for persons   position that becomes
                                    remaining term of office   to fill such vacancy      vacant is for more than
                                    for the vacant Governor    are made by, the NYSE     12 months, such vacancy
                                    position is more than      Group Committee in the    is filled by the
                                    one year, the Governor     case of a vacant NYSE     members of the New SRO
                                    elected by the Board to    Public Governor           entitled to vote
                                    fill such position         position, such vacancy    thereon at a meeting
                                    stands for election in     is only filled by the     thereof convened to
                                    the next annual election.  Board, and nominations    vote thereon.
                                                               for persons to fill      All other vacancies are
                                                               such vacancy are made     filled by the Board.
                                                               by the Nominating
                                                               Committee, in the case
                                                               of a vacant Joint
                                                               Public Governor
                                                               position or such
                                                               vacancy is only filled
                                                               by, and nominations for
                                                               persons to fill such
                                                               vacancy are made by,
                                                               the NASD Group
                                                               Committee in the case
                                                               of a vacant NASD Public
                                                               Governor position.
                                                              In the event of any
                                                               vacancy among the Floor
                                                               Member Governor, the
                                                               Investment Company
                                                               Affiliate Governor or
                                                               the Independent Dealer/
                                                               Insurance Affiliate
                                                               Governor during the
                                                               Transitional Period,
                                                               such vacancy is only
                                                               filled by, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by, the NYSE
                                                               Group Committee in the
                                                               case of a Floor Member
                                                               Governor vacancy, such
                                                               vacancy is only filled
                                                               by the Board, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by the
                                                               Nominating Committee,
                                                               in the case of an
                                                               Investment Company
                                                               Affiliate Governor
                                                               vacancy or such vacancy
                                                               is only filled by, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by, the NASD
                                                               Group Committee in the
                                                               case of an Independent
                                                               Dealer/Insurance
                                                               Affiliate Governor
                                                               vacancy.
                                                              In the event of any
                                                               vacancy among the Large
                                                               Firm Governors, the Mid-
                                                               Size Firm Governor or
                                                               the Small Firm
                                                               Governors during the
                                                               Transitional Period,
                                                               such vacancy is only
                                                               filled by, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by, the NYSE
                                                               Group Governor
                                                               Committee in the case
                                                               of a Large Firm
                                                               Governor vacancy, such
                                                               vacancy is only filled
                                                               by the Board, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by the
                                                               Nominating Committee,
                                                               in the case of the Mid-
                                                               Size Firm Governor
                                                               vacancy or such vacancy
                                                               is only filled by, and
                                                               nominations for persons
                                                               to fill such vacancy
                                                               are made by, the NASD
                                                               Governor Committee in
                                                               the case of a Small
                                                               Firm Governor vacancy:
                                                               provided, however, that
                                                               in the event the
                                                               remaining term of
                                                               office of any Large
                                                               Firm, Mid-Size Firm or
                                                               Small Firm Governor
                                                               position that becomes
                                                               vacant is for more than
                                                               12 months, nominations
                                                               shall be made as set
                                                               forth above in this
                                                               paragraph, but such
                                                               vacancy is filled by
                                                               the members of the New
                                                               SRO entitled to vote
                                                               thereon at a meeting
                                                               thereof convened to
                                                               vote thereon.

[[Page 14155]]

 
Nominations......................  The National Nominating    In the case of the first  The Nominating
                                    Committee, which is not    annual meeting of         Committee, which is a
                                    a committee of the         members following the     committee of the Board,
                                    Board, nominates and, in   Closing, nominations      nominates and, in the
                                    the event of a contested   are by the Board of       event of a contested
                                    election, may support:     Directors of NYSE         election, may support:
                                    Industry, Non-Industry     Group, Inc. with          Large Firm, Mid-Size
                                    and Public Governors for   respect to Large Firm     Firm, Small Firm,
                                    each vacant or new         Governors, jointly by     Public, Floor Member,
                                    Governor position on the   the Board of Directors    Independent Dealer/
                                    NASD Board for election    of NYSE Group, Inc. and   Insurance Affiliate and
                                    by the membership;         the Board in office       Investment Company
                                    Industry, Non-Industry     prior to the Closing      Affiliate Governors for
                                    and Public Directors for   with respect to the Mid-  each vacant or new
                                    each vacant or new         Size Firm Governor and    Governor position on
                                    position on the NASD       by the Board in office    the New SRO Board;
                                    Regulation Board and the   prior to the Closing      Industry and Public
                                    NASD Dispute Resolution    with respect to Small     Directors for each
                                    Board for election by      Firm Governors.           vacant or new position
                                    the stockholder; and                                 on the NASD Regulation
                                    Industry, Non-Industry,                              Board and the NASD
                                    and Public members for                               Dispute Resolution
                                    each vacant or new                                   Board for election by
                                    position on the National                             the stockholder; and
                                    Adjudicatory Council for                             Industry and Public
                                    appointment by the NASD                              members for each vacant
                                    Regulation Board.                                    or new position on the
                                                                                         National Adjudicatory
                                                                                         Council for appointment
                                                                                         by the NASD Regulation
                                                                                         Board.
Composition and Qualifications of  The National Nominating    The Nominating Committee  The Nominating Committee
 the Nominating Committee.          Committee consists of no   is jointly populated by   consists of such number
                                    fewer than six and no      the Chief Executive       of members of the Board
                                    more than nine members.    Officer and the Chief     as the Board determines
                                    The number of Non-         Executive Officer of      from time to time. The
                                    Industry committee         NYSE Regulation, Inc.     number of Public
                                    members equals or          as of Closing (or his     Governors on the
                                    exceeds the number of      duly appointed or         Nominating Committee
                                    Industry committee         elected successor as      equals or exceeds the
                                    members. If the National   Chair of the Board),      number of Industry
                                    Nominating Committee       subject to ratification   Governors on the
                                    consists of six members,   of the appointees by      Nominating Committee.
                                    at least two must be       the Board. The number     The Nominating
                                    Public committee           of Public Governors on    Committee is at all
                                    members. If the National   the Nominating            times comprised of a
                                    Nominating Committee       Committee equals or       number of members which
                                    consists of seven or       exceeds the number of     is a minority of the
                                    more members, at least     Industry Governors on     entire Board and the
                                    three must be Public       the Nominating            Chief Executive Officer
                                    committee members. No      Committee. The            may not be a member of
                                    officer or employee of     Nominating Committee is   the Nominating
                                    the NASD serves as a