July 27, 2007
I am further supplementing, clarifying and amending my comment letter of April 5, 2007, as previously supplemented, clarified and amended on June 4, 2007, in response to two points in the July 16, 2007 comment letter of William Haubert on behalf of NASD.
First, Mr. Haubert references Section 4 of the Restated Certificate of Incorporation (the "Charter") of NASD, next refers to Article XVI of the NASD By-Laws, accepts that the Charter and By-Laws set forth a 30 day voting period procedure in connection with proposed amending of By-Laws, and then goes on to state that the "power of Members to amend the By-Laws cannot be limited by any charter provision, much less by any mere by-law."
The Charter of NASD is not just any old ordinary Delaware corporate charter and the By-Laws of the NASD are not mere by-laws. The NASD is a self-regulatory orgainzation ("SRO") registered with the SEC. The Charter states in Section 3(5) that its existence is "intended to provide a medium for effectuating the purposes of Section 15A of the Securities Exchange Act of 1934." Courts have declared the Charter and By-Laws are part of a "complex self regulatory scheme" enforced by the SEC. (See Merrill Lynch, 616 F.2d at 1368 (5th Cir. 1980)). A federal court in the Standard Investment Chartered, Inc. case earlier this year accepted that proposing amendments to NASD By-Laws is an exercise of the NASD's rulemaking authority and stated "the rules of an SRO include its bylaws and articles of incorporation." (See also 15 U.S.C. Section 78c(a)(27)). The Standard Investment Chartered, Inc. court further concluded that plaintiffs in the case must initially challenge the process of amending NASD By-Laws (since this constitutes SRO rulemaking) in front of the federal agency that administers the Securities Exchange Act of 1934. Thus, the NASD is (1) a SRO intended to provide a medium for effectuating the purposes of the Securities Exchange Act of 1934 and (2) whose Charter and By-Laws are part of its rules and proposed changes relating to such rules must be initially challenged before the SEC instead of in a court.
The SEC approved the existing Charter and By-Laws of the NASD many years ago and determined the Charter and By-Laws did, among other things, "assure a fair representation of the organization's members in the ... administration of its affairs" (15 U.S.C. Section 78o-3(b)(4)) and "promote just and equitable principles of trade" (15 U.S.C. Section 78o-3(b)(6)). The rules promising fairness of the NASD's affairs include the Charter, which limits the method for amending the By-Laws to those procedures prescribed by the By-Laws. The 30 day voting limit was established in the By-Laws to enable common sense by-law amendments to be enacted in a timely, efficient and cost effective manner and to prevent NASD members from being bludgeoned day-after-day-after-day for more than 30 days from one calendar year to the next with calls and correspondence paid for by deep pockets in a fashion reminiscent of a drawn-out Presidential campaign. It is patently unjust and contravenes the concepts of fairness (that are part of the NASD's rules) to allow the rules (Charter and By-Laws) to be violated so that dozens of meetings, numerous calls and massive mailings can occur during a voting period lasting more than a month. If 30 days was not enough time, why is the period in the rules? And if 30 days is not enough time, why is 40 days enough? What might have happened if 58 days had been allowed for voting? Might votes have changed and the total vote turned out differently?
Mr. Haubert's position (quoted above) seems predicated on the notion that if a corporate bylaw purports to nullify a provision of the General Corporation Law of the State of Delaware, the bylaw is void in this respect. This is incorrect as it relates to the NASD's Charter and By-Laws concerning the the provision for amending the By-Laws. Mr. Haubert is also attempting to create disharmony within the rules and law where none exists. As discussed in my June 4, 2007 letter, Article XVI of the By-Laws does not eliminate the ability of NASD members to approve by-law changes at a special meeting -- a special meeting to amend the by-laws must still follow the NASD 30 day voting rule. You can't start voting in the first half of December and end it in the second half of January.
The Charter and By-Laws are rules of the NASD. As noted above, the SEC approved the Charter and By-Laws as part of a complex and carefully tailored self regulatory scheme put forward by the federal government many years ago. The rules assure fair administration of the NASD's affairs and, in part because of this fairness requirement, NASD members are given no immediate avenue to court to protest rulemaking or rule changing process, they must rely on SEC interpretations of fairness. The rights of NASD members are limited. The judge in the Standard Investment Chartered, Inc. cas went so far as to suggest that "the SEC ... has the authority ... to impose ... By-Law amendments ... without a vote of the NASD membership." A typical Delaware non-stock corporation and its members would not be subject to his kind of treatment. Indeed, the NASD is very unique and its rules (for discipling members, as just one example) are upheld even when the rules are different than would be provided by other law. Any so-called "mandatory" provision of Delaware law that would seem to conflict (or actually does conflict) with federaaly mandated requirements is trumped.
Second, Mr. Haubert asserts there is no wording in Article XVI of the By-Laws to suggest it is the exclusive procedure by which the By-Laws may be modified. This is because Section 4 of the Charter states that voting on amendments to the By-Laws shall be "in accordance with the procedures for such a vote as provided in the By-Laws" and the only voting procedure contained in the By-Laws is in Article XVI and requires 30 days.