By Peter Silvern, JD, Writer/Analyst, Federal Securities Law Reports, Mutual Funds Guide, Investment Adviser Newsletter

NASD Board Agrees to Historic Restructuring

The Board of Governors for the National Association of Securities Dealers voted unanimously on January 4^th to institute a dramatic restructuring of the 60 year old NASDAQ market. Once completed, as much as 79 percent of a newly established NASDAQ company will be owned by members, institutional investors and market issuers. After the board meeting, NASD chairman and CEO, Frank Zarb, led a teleconference with reporters where he spoke about the restructuring, how it will be managed, and what it will mean to the NASD, the NASDAQ and the financial community as a whole.

Mr. Zarb, a driving force behind the restructuring, said the sale of NASDAQ common stock and warrants will come in a two phases. He stressed that at this time there will not be an IPO of the shares to the general public, although a decision to do so may come at a future date. When phase one takes place, NASDAQ will offer newly-issued shares and the NASD will sell warrants to purchase outstanding NASDAQ shares. Mr. Zarb described the recapitalization as a private sale to three main constituents: members at large, market participants, and NASDAQ issuers. In phase one of the sale, approximately 47-49 percent of available shares and warrants will be offered. In phase two, the same three main constituents will have the opportunity to purchase an additional 30 percent. Once the sale is completed, Mr. Zarb explained, the NASD membership will retain 22 percent ownership. If there is an IPO to the general public the NASD membership will have the opportunity to increase its ownership stake by an additional 8 percent with the majority of the additional shares going to smaller broker-dealers.

The main benefits of this restructuring will include a reduction of membership fees by $114 million and a $600 per firm rebate in the year 2000 to all NASD members. In addition, $500 million in proceeds will go to the NASD to support the regulatory, oversight and membership activities it was originally chartered to administer. The AMEX Exchange, which merged with the NASD last year, will remain a member and gain $205 million when the sale is complete. Another significant benefit of the plan is the tax exempt status of NASD will be preserved.

Frank Baxter, who chaired a committee originally charged with creating a roadmap for the restructuring, also participated in the teleconference. Mr. Baxter said it was his view the NASD had inadvertently gotten away from its original roots because of sweeping changes in technology and regulatory governance. Baxter stated that he feels the resulting plan transcends the various individual differences among NASD's diverse membership.

Robert Glauber, Chairman of the NASD's Fairness Committee was also a teleconference participant. Glauber explained that the Fairness Committee was charged with making an independent review of the Baxter Committee's plan and determining its fairness to the membership as a whole. In the course of making this assessment the Fairness Committee made several significant changes to the original plan. The final version and scope of the plan, Mr. Glauber said, is more equitable to all members while still meeting the original objectives of the Baxter Committee.

A fourth participant in the teleconference was board member Alan Davidson. Mr. Davidson stated 90 percent of the NASD membership is made up of small businesses under the Government's definition and it was his goal to make sure the eventual plan fairly represented these small company members. While acknowledging differences with CEO Frank Zarb in the past, Mr. Davidson said the plan approved by the board was a good and fair deal for the membership. Mr. Davidson stated he, too, thought the plan would help return the NASD to its original role.

The sale of NASDAQ is subject to tax rulings and certain SEC approvals as well as a vote of the NASD membership. The new structure of the organization will have NASD controlling AMEX, LLC, NASDR, which has oversight of regulatory duties, and a 22 percent stake in NASDAQ. Once completed, the sale of NASDAQ is thought to be worth nearly $1 billion.