








                     UNITED STATES OF AMERICA
                           before the
                SECURITIES AND EXCHANGE COMMISSION


Securities Exchange Act of 1934
Release No. 37538 / August 8, 1996

Administrative Proceeding
File No. 3-9056


_______________________________
                               :
In the Matter of               :          ORDER INSTITUTING
                               :          PUBLIC PROCEEDINGS
                               :          PURSUANT TO SECTION
NATIONAL ASSOCIATION OF        :          19(h)(1) OF THE
                               :          SECURITIES EXCHANGE
SECURITIES DEALERS, INC.       :          ACT OF 1934, MAKING
                               :          FINDINGS AND IMPOSING
                               :          REMEDIAL SANCTIONS
                               :
_______________________________:


                                I.

     The Securities and Exchange Commission ("Commission") deems
it appropriate and in the public interest that public proceedings
be instituted pursuant to Section 19(h) of the Securities
Exchange Act of 1934 ("Exchange Act") against the National
Association of Securities Dealers, Inc. ("the NASD").  In
anticipation of this proceeding, the NASD has submitted an Offer
of Settlement which the Commission has determined to accept.
Solely for the purposes of this proceeding and any other
proceeding brought by or on behalf of the Commission or to which
the Commission is a party, prior to a hearing pursuant to the
Commission's Rules of Practice, 17 C.F.R. 201.100 et seq., the
NASD, by its Offer of Settlement, without admitting or denying
the Commission's findings except those contained in Section
III.A. below, which are admitted, consents to the entry of this
Order Instituting Public Proceedings, Making Findings and
Imposing Remedial Sanctions.-[1]-

---------FOOTNOTES----------
     -[1]-     Simultaneously with the issuance of this Order the
               Commission released a Report Pursuant to Section
               21(a) of the Securities Exchange Act of 1934
               Regarding the NASD and the Nasdaq Market (the
               "Report").  The findings made herein are solely
                                                   (continued...)
==========================================START OF PAGE 2======


                               II.

     Accordingly, IT IS HEREBY ORDERED, that proceedings pursuant
to Section 19(h) of the Exchange Act be, and they hereby are,
instituted.


                               III.

     On the basis of this Order and the Offer of Settlement
submitted by the NASD, the Commission finds that:

     A.  RESPONDENT

     The NASD is a Delaware nonstock corporation which is and at
all relevant times was registered with the Commission as a
national securities association pursuant to Section 15A(b) of the
Exchange Act.  At all relevant times, the NASD operated the
Nasdaq Stock Market, Inc. ("the Nasdaq market"), an over-the-
counter securities market featuring the electronic display of
dealer price quotations.  In January 1996, the NASD incorporated
NASD Regulation, Inc. ("NASDR") as a wholly owned subsidiary to
be delegated day-to-day responsibility for the self-regulatory
operations of the NASD.

     B.  MISCONDUCT IN THE NASDAQ STOCK MARKET

     The Nasdaq market has not always operated in an open and
freely competitive manner.  Nasdaq market makers have engaged in
conduct which has resulted in artificially inflexible spreads
between dealer price quotations for many Nasdaq securities and
unduly disadvantageous prices to investors trading in those
securities.  A number of Nasdaq market makers have also taken
action to discourage competition.  At the same time, various
Nasdaq market makers have coordinated price quotations,
transactions and transaction reports in order to protect or
advance their proprietary interests, to the detriment of
investors and other market participants.  Many Nasdaq market
makers have also failed to satisfy their basic obligations to
transact at quoted prices and to report transactions in a timely
and accurate manner.  These activities involved potentially
serious violations of NASD rules and the federal securities laws.

---------FOOTNOTES----------
     -[1]-(...continued)
               for the purpose of this proceeding and are not
               binding on any other person or entity named as a
               respondent or defendant in any other proceeding.
               Moreover, the findings made herein do not affect
               the NASD's rights in any respect as to parties
               other than the Commission.
==========================================START OF PAGE 3======

     C.   THE NASD'S PERFORMANCE AS A SELF-REGULATORY
          ORGANIZATION

     The Exchange Act requires the NASD, as a self-regulatory
organization, to comply with, and vigorously enforce, in an
evenhanded and impartial manner, the provisions of the Exchange
Act, the rules and regulations thereunder and its own rules, in
carrying out its role as the entity responsible for the day-to-
day oversight of its members and the Nasdaq market.-[2]-
The NASD has an affirmative obligation to be vigilant in
surveilling for, evaluating, and effectively addressing issues
that could involve violations of such provisions.

     The NASD, during the period covered in the Report, did not
comply with certain of its rules or satisfy its obligations under
the Exchange Act to enforce its rules and the federal securities
laws.  It has inadequately enforced rules applicable to market
makers while applying, in certain cases, ad hoc standards and
criteria not embodied in NASD rules.  This is attributable, in
part, to the undue influence of Nasdaq market makers in the
regulatory processes of the NASD.  As a result of these
regulatory failures, the NASD has violated the duties imposed on
it by the Exchange Act.

     1.   THE NASD'S INADEQUATE RESPONSE TO MISCONDUCT IN NASDAQ

     By 1990, the NASD was aware of information suggesting that
its members were engaged in misconduct which had potential
anticompetitive implications and could be detrimental to the
interests of investors.  This information included: (a) facts and
circumstances evidencing a convention among dealers that resulted
in many stocks being quoted almost invariably in even-eighths;
(b) evidence of spreads and dealer quotations being artificially
inflexible with market makers having little incentive to narrow
them; and (c) facts indicating that some market makers retaliated
against other market makers who attempted to improve upon
quotations otherwise prevailing in the market.  The NASD failed
to take appropriate action to thoroughly investigate these
problems and take effective regulatory action.  In particular,
the NASD did not utilize the NASD's surveillance and enforcement
resources to inquire into the conduct of market makers to
ascertain whether violations of the NASD's rules or the federal
securities laws had occurred and whether disciplinary action
against market makers for such conduct was warranted.





---------FOOTNOTES----------
     -[2]-     Sections 19(g) and 19(h) of the Exchange Act, 15
               U.S.C.  78s(g) and 78s(h).
==========================================START OF PAGE 4======

     2.   FAILURE TO ENFORCE FIRM QUOTE RULE

     Market makers on Nasdaq have the obligation to trade at
their quotations.-[3]-  Many market makers, however, have
repeatedly failed to honor their quotations even though no
exception was available.  The NASD is required to enforce the
market makers' obligation to trade at their quotations, but has
failed to adequately enforce compliance by market makers with
this obligation.

     3.   FAILURE TO ENFORCE TRADE REPORTING RULE

     Market makers on Nasdaq have the obligation to report
transactions on a timely and accurate basis.-[4]-  Many
market makers, however, have repeatedly failed to report
transactions on a timely and accurate basis.  The NASD is
required to enforce the market makers' obligation to report
transactions on a timely and accurate basis, but has failed to
adequately enforce compliance by market makers with this
obligation.

     4.   FAILURE TO COMPLY WITH RULES RELATING TO NASD
          MEMBERSHIP


---------FOOTNOTES----------
     -[3]-     The firm quote rule is Exchange Act Rule 11Ac1-1,
               17 C.F.R.  240.11Ac1-1 (1996), and similar
               requirements are found in the NASD's rules.  NASD
               Manual, Article III, Rules of Fair Practice,  6,
               and NASD Bylaws, Schedule D, Part V,  2(b) and
               Part VI,  2, (CCH)    1819, 1829 and 2156 (1995).

               These rules require that market makers trade up to
               the amount of their quotations at whatever prices
               they have posted.  Market makers are excepted from
               this duty only if (1) they change a quotation
               before receiving an order, or (2) they are in the
               process of executing a transaction when they
               receive an order, and send a new quotation to the
               Nasdaq immediately upon executing that
               transaction.

     -[4]-     Pursuant to Rules 11Aa3-1 and 11Aa3-2 under the
               Exchange Act of 1934, 17 C.F.R.  240.11Aa3-1 and
               11Aa3-2, the NASD adopted a transaction reporting
               plan for National Market System securities in
               1982.  Securities Exchange Act Release No. 18590
               (March 31, 1982), 47 Fed. Reg. 13617.  As part of
               this plan, transactions in designated Nasdaq
               securities must be reported within 90 seconds
               after execution.  NASD Manual, Schedule D to the
               By-Laws, Part X,  2(a), (CCH)   1867 (1995). 
==========================================START OF PAGE 5======

     The NASD processed the applications for membership of
certain firms in a manner inconsistent with its rules.  It
required such applicants to satisfy criteria not enumerated in
the rules, failed to process their applications within a
reasonable time, placed improper restrictions on their activities
as a condition to membership, and prevented such members, once
admitted, from seeking modifications to their restriction
agreements as permitted by the NASD's rules.-[5]-

     D.  CONCLUSION

     Based upon the foregoing, the Commission finds that during
the relevant period the NASD has failed to comply with certain
NASD rules and, without reasonable justification or excuse,
failed to enforce compliance with the Exchange Act, the rules and
regulations thereunder and its own rules, in violation of Section
19(g) of the Exchange Act.-[6]-

     The NASD has represented that in conjunction with the
undertakings set forth below and other remedial measures it has
taken and will take, the Board of Governors of the NASD and the
Board of Directors of NASDR have authorized $25 million and have
committed to expend an additional $75 million over the next five
years, to enhance its systems for market surveillance, including
the development and implementation of an enhanced audit trail,



---------FOOTNOTES----------
     -[5]-     The rules relating to membership applications are
               set forth in the NASD By-Laws.  NASD Manual,
               Schedule C to the By-Laws, Part I (CCH)   1783
               (1995).  This Order makes no findings as to the
               NASD's processing or final determination of any
               specific membership application.

     -[6]-     Among other things, the NASD failed to take
               appropriate investigative and enforcement action
               with respect to possible violations of Sections
               10(b), 11A and 15(c) of the Exchange Act, and
               Rules 10b-5, 11Aa3-1(c), 11Ac1-1(c) and 15c1-2
               promulgated thereunder, and certain of the NASD's
               rules, including Article III,  1 of the NASD's
               rules of Fair Practice, NASD Manual (CCH)   2151
               (1995), the NASD's rules regarding the firm quote
               obligations of market makers, NASD Manual, Article
               III, Rules of Fair Practice,  6, and NASD Bylaws,
               Schedule D, Part V,  2(b) and Part VI,  2, (CCH)
                  1819, 1829 and 2156 (1995), and the NASD's
               rules regarding trade reporting, NASD Manual,
               Schedule D to the By-Laws, Part X,  2(a), (CCH)
               1867 (1995). 
==========================================START OF PAGE 6======

and to increase its staffing in the areas of examination,
surveillance, enforcement, and internal audit.-[7]-

     In recognition of this commitment, the Commission has
determined not to seek a monetary penalty from the NASD.

                               IV.

     In view of the foregoing, it is in the public interest to
impose the sanctions specified in the NASD's Offer of Settlement.

     Accordingly, IT IS HEREBY ORDERED THAT:

     A.  The NASD be, and hereby is, censured.

     B.  The NASD shall comply with the following undertakings
within the next twelve months (or within such other time period
as is otherwise noted below):

          1.   To implement and maintain at least fifty percent
               independent public and non-industry membership in
               its Board of Governors, the Board(s) of Governors
               or Directors of all of its subsidiaries and
               affiliates that exercise or have delegated self-
               regulatory functions, and the following
               committees: the National Nominating Committee, the
               Trading/Quality of Markets Committee, the
               Arbitration Committee, the Market Surveillance
               Committee, the National Business Conduct
               Committee, the Management Compensation Committee,
               and all successors thereto.

          2.   To provide that NASDR and any successor thereto
               has, consistent with the NASD's By-Laws and Plan
               of Delegation, as amended from time to time and as
               approved by the Commission, primary day-to-day
               responsibility for the regulation, surveillance,
               examination and disciplining of NASD member firms
               and registered persons, with respect to market
               activities as well as other self-regulatory
               matters, with full access to the records of the
               Nasdaq market.


---------FOOTNOTES----------
     -[7]-     These funds are in addition to 1995 funding levels
               for these activities.  If, over the course of this
               time period, the Board of Governors of the NASD
               and the Board of Directors of NASDR believe that
               the $100 million expenditure is not achievable or
               feasible, the NASD may, by application to the
               Commission, seek modification of this commitment.
==========================================START OF PAGE 7======

          3.   To institute the participation of professional
               hearing officers (who shall be attorneys with
               appropriate experience and training) to preside
               over disciplinary proceedings.

          4.   To provide for the autonomy and independence of
               the regulatory staff of the NASD and its
               subsidiaries such that the staff, subject only to
               the supervision of the Board of Governors of the
               NASD and the Boards of Directors of NASDR and
               Nasdaq, and any successor thereto, (a) has sole
               discretion as to what matters to investigate and
               prosecute, (b) has sole discretion to handle
               regulatory matters such as approval of
               applications for membership and the conditions and
               limitations that may be placed thereon, (c)
               prepares rule proposals, rule interpretations and
               other policy matters with any consultations with
               interested NASD constituencies made in a fair and
               evenhanded manner, and (d) is generally insulated
               from the commercial interests of its members and
               the Nasdaq market.  Among other things, the
               District Business Conduct Committees and the
               Market Surveillance Committee shall not have any
               involvement in deciding whether or not to
               institute disciplinary proceedings, nor shall the
               District Committees, or any subcommittee thereof,
               have any involvement in the review or approval of
               applications for membership in the NASD.  Subject
               to the foregoing, the regulatory staff of the
               NASDR engaged in the disciplinary process may,
               solely on their own initiative, inform themselves
               on matters of market or other securities industry
               expertise by consulting with representatives of
               member firms or committees of the NASD or its
               subsidiaries.

          5.   To promulgate and apply on a consistent basis
               uniform standards for regulatory and other access
               issues, such as admission to the NASD as a member
               firm, and conditions to becoming a market maker;
               and institute safeguards to ensure fair and
               evenhanded access to all services and facilities
               of the NASD.

          6.   To ensure the existence of a substantial,
               independent internal audit staff which reviews all
               aspects of the NASD (including the regulatory
               function, the disciplinary process and the Nasdaq
               stock market and its systems) and reports directly
               to an audit committee of the NASD Board of
               Governors which includes a majority of public and
==========================================START OF PAGE 8======

               non-industry Governors and is chaired by a public
               Governor.

          7.   To design and implement within the next twenty-
               four months (or as specified by further order of
               the Commission) an audit trail sufficient to
               enable the NASD to reconstruct markets promptly,
               effectively surveil them and enforce its rules;
               which audit trail shall, subject to the
               Commission's approval, at a minimum, (a) provide
               an accurate time-sequenced record of orders and
               transactions, beginning with the receipt of an
               order at the first point of contact between the
               broker-dealer and the customer or counterparty and
               further documenting the life of the order through
               the process of execution (or partial or non-
               execution) of that order, and (b) provide for
               Nasdaq marketwide synchronization of clocks
               utilized in connection with the audit trail.

          8.   To improve substantially the surveillance and
               examination of order handling.

          9.   To improve substantially the reliability of trade
               reporting through, among other things, enhancement
               of surveillance, examination, and enforcement.

          10.  To upgrade substantially the NASD's capability to
               enforce the firm quote rule, by (a) implementing a
               process for backing away complaints to be
               addressed as they are made during the trading day
               so that valid complaints may be satisfied with a
               contemporaneous trade execution; and (b) taking
               other appropriate actions.

          11.  To propose a rule or rule interpretation for
               Commission approval which expressly makes unlawful
               the coordination by or among market makers of
               their quotes, trades and trade reports, and which
               prohibits retribution or retaliatory conduct for
               competitive actions of another market maker or
               other market participant.
==========================================START OF PAGE 9======

          12.  To enforce Article III, Section 1 of the NASD
               Rules of Fair Practice, with a view to enhancing
               market maker competitiveness by

               a.   Acting to eliminate anticompetitive or
                    unlawfully enforced or maintained industry
                    pricing conventions, and to discipline market
                    makers who harass other market makers for
                    narrowing the displayed quotations in the
                    Nasdaq market, trading not more than the
                    quantities of securities they are required to
                    trade under the NASD's rules, or otherwise
                    engaging in competitive conduct.

               b.   Acting to eliminate coordination between or
                    among market makers of quotes, trades and
                    trade reports.

               c.   Acting to eliminate concerted discrimination
                    and concerted refusals to deal by market
                    makers.

          13.  To redefine or repeal the excess spread rule so as
               to eliminate any disincentive to narrow the
               displayed quotations in the Nasdaq market.

          14.  To retain an independent consultant, acceptable to
               the Commission staff, to review and report to the
               Audit Committee of the NASD Board of Governors on
               the implementation of these undertakings.  The
               Audit Committee shall report the findings of the
               independent consultant with respect to such
               implementation to the Chairman of the NASD Board
               of Governors and to the Commission's Divisions of
               Market Regulation and Enforcement beginning six
               (6) months after the date of this Order and
               thereafter annually for three years, beginning on
               the first anniversary of this Order and concluding
               with the third anniversary of this Order;
               provided, however, that the appointment and
               activities of the independent consultant shall in
               no way limit the lawful authority of the
               Commission or its staff with respect to the NASD.


     By the Commission.


                                   ________________________
                                   Jonathan G. Katz
                                   Secretary
