## Facts

- The Maloney Act amendments to the Securities Exchange Act of 1934 authorized industry self-regulatory organizations to register as national securities associations subject to SEC oversight.
- The National Association of Securities Dealers, Inc. (NASD) was an organization of brokers and dealers active in the over-the-counter market and was registered with the Securities and Exchange Commission (SEC) as a national securities association under Exchange Act § 15A.
- When the SEC permitted NASD’s registration, the SEC noted a significant gap in NASD’s rules: they did not include provisions aimed at assuring member solvency.
- NASD proposed an amendment to its bylaws that would add a membership condition requiring fixed minimum net capital:
  - $5,000 minimum net capital for members that dealt directly with customers.
  - $2,500 minimum net capital for members that did not deal directly with customers.
- NASD distributed the proposal to its membership for a vote using an open (non-secret) ballot.
- The proposed capital thresholds were expected to disqualify a significant portion of members; estimates indicated that more than one-fourth of NASD’s members would be expelled if the amendment went into effect and was enforced.
- Although a majority of voting members approved the amendment, the open-ballot format raised concern that smaller dealers might have been influenced to vote in favor of the measure—or to refrain from voting—because their positions would not be confidential.
- Because § 15A requires SEC review of NASD bylaw changes, NASD submitted the amendment to the SEC for approval.

## Issues

1. Whether NASD’s bylaw amendment imposing fixed minimum net-capital membership requirements satisfied Exchange Act § 15A standards for association rules aimed at investor protection, fair dealing, and the public interest.
2. Whether the amendment’s exclusionary impact on smaller firms made it an improper or unfair membership restriction under § 15A.
3. Whether NASD’s use of an open, non-secret ballot in adopting the amendment raised procedural concerns serious enough to warrant SEC disapproval.

## Decision

- The SEC approved NASD’s bylaw amendment establishing minimum net-capital requirements as a condition of membership.
- The SEC viewed minimum capital as a legitimate financial-responsibility measure directly related to protecting customers and reducing the risks posed by undercapitalized members.
- The SEC acknowledged that adoption would likely force many members either to raise capital or lose membership, but concluded that this consequence did not, by itself, make the rule impermissible where the requirement was reasonably connected to solvency and investor protection.
- The SEC did not reject the amendment solely because NASD used an open ballot, though it treated the voting method as a serious governance concern and cautioned against procedures that could pressure or chill member participation.

## Legal Principles

- Under Exchange Act § 15A, the SEC may approve a national securities association’s bylaw amendments when the rules are reasonably designed to protect investors and serve the public interest, including by addressing member financial responsibility.
- A self-regulatory association may condition membership on objective financial standards, including fixed minimum net-capital requirements, when the standard is tied to solvency and customer protection rather than arbitrary exclusion.
- Significant competitive effects or reductions in membership do not automatically bar SEC approval if the association can justify the restriction as a reasonable means of addressing financial-responsibility risks.
- In reviewing association bylaws, the SEC may consider governance and voting procedures (such as whether voting is secret), and may warn against practices that could distort member choice, but procedural imperfections do not necessarily require disapproval where the substantive rule meets statutory requirements.

## Conclusion

In the Matter of National Association of Securities Dealers, Inc., Release No. 34-3322 (1942), the SEC approved NASD’s bylaw amendment requiring minimum net capital for membership, treating capital adequacy as a valid investor-protection and solvency measure even though it would exclude many smaller firms, and while expressing concern about NASD’s use of an open, non-secret ballot.
