[Federal Register Volume 59, Number 50 (Tuesday, March 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5930]
[[Page Unknown]]
[Federal Register: March 15, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33725; File No. SR-NASD-94-12]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by National
Association of Securities Dealers, Inc. Relating to Article III,
Section 44 of the Rules of Fair Practice and Schedules A and E to the
NASD By-Laws
March 7, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on February
28, 1994, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the NASD. By this Release, the Commission: (i) Solicits comments on the
proposed rule change from interested persons, and (ii) approves the
proposed rule change on an accelerated basis.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Below is the text of the proposed rule change. Proposed new
language is in italics; proposed deletions are in brackets.
RULES OF FAIR PRACTICE
THE CORPORATE FINANCING RULE
Underwriting Terms and Arrangements
Sec. 44.
(b) Filing Requirements.
* * * * *
(6) Information Required to be Filed.
* * * * *
(G) a detailed explanation and any documents related to the
modification of any item of underwriting compensation subsequent to the
review and approval of such compensation by the NASD.
* * * * *
(10) Filing Fees.
* * * * *
(B) Amendments to the initially filed documents which increase the
number of securities being offered shall be accompanied by an
additional amount of filing fee equal to .01% of the per share offering
price of the new or additional securities, multiplied by the number of
new or additional securities being offered [increase in the amended
gross dollar amount of the offering], not to exceed $30,500 when
aggregated with all fees previously paid.
* * * * *
SCEDULES TO THE BY-LAWS
SCHEDULE A
Sec. 6. Fees for Filing Documents Pursuant to the Corporate Financing
Rule
* * * * *
(b) Amendments to the initially filed documents which increase the
number of securities being offered shall be accompanied by an
additional amount of filing fee equal to .01% of the per share offering
price of the new or additional securities, multiplied by the number of
new or additional securities being offered [increase in the amended
gross dollar amount of the offering], not to exceed $30,500 when
aggregated with all fees previously paid.
* * * * *
SCHEDULE E
Distribution of Securities of Members and Affiliates
* * * * *
Sec. 3. Participation in Distribution of Securities of Member or
Affiliate
* * * * *
(c) If a member proposes to underwrite, participate as a member of
the underwriting syndicate or selling group, or otherwise assist in the
distribution of a public offering of its own or an affiliate's
securities subject to this section [without limitation as to the amount
of securities to be distributed by the member], one or more of the
following three criteria shall be met. * * *
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the 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. The 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
Filing Requirements
The filing requirements of Subsection (b) to Article III, Section
44 of the Rules of Fair Practice (``Corporate Financing Rule'')\1\
require submitting to the Corporate Financing Department for review
each pre-effective and post-effective amendment to the registration
statement and any other amended document previously filed, marked to
show changes. The final registration statement declared effective by
the Securities and Exchange Commission or an equivalent final offering
document must also be filed. The required filings allow the Corporate
Financing Department to review what effect, if any, such changes have
on the fairness and reasonableness of the underwriting compensation and
arrangements. Additionally, the Corporate Financing Department's ``no
objections'' letter restates the requirement to file amendments and the
final prospectus and indicates that modification of the terms and
arrangements of the offering may result in a change in the Department's
fairness opinion.
---------------------------------------------------------------------------
\1\NASD Manual, (CCH) 2200D.
---------------------------------------------------------------------------
The Corporate Financing Department is aware that certain items or
underwriting compensation received by underwriters and related persons
in connection with the distribution of a public offering, and approved
by the Department, are sometimes modified subsequent to the
effectiveness of the offering. Such modifications include, for example,
payments to an underwriter for the buyout or waiver of a right of first
refusal, adjustments to the exercise price (usually downward)\2\ or to
the term of the underwriter's warrants (usually lengthening), payments
under financial consulting contracts, and other negotiated changes in
connection with additional services sometimes provided by the
underwriter to the issuer. The NASD is concerned that modifications to
items of underwriting compensation, particularly if such modifications
occur after the effectiveness of the offering, might not be disclosed
in amendments or other documents and may not come to the attention of
the Corporate Financing Department. Such modifications to compensation
may be found to be unfair or unreasonable in light of the approved
compensation and arrangements of the public offering and the applicable
compensation guidelines for such offering. The proposed rule change
would add new subsection (G) to subsection (b)(6) to section 44 to the
Rules of Fair Practice to clarify the requirement that the Corporate
Financing Department be notified in detail of any change in, or
modification of, any item of underwriting compensation approved by the
Department.
---------------------------------------------------------------------------
\2\But see Securities Exchange Act Release No. 33119 (October
29, 1993), 58 FR 65084 (November 5, 1993).
---------------------------------------------------------------------------
Filing Fees
Subsection (b)(10) to the Corporate Financing Rule and Section 6 of
Schedule A to the NASD By-Laws (``Schedule A'')\3\ require a filing fee
for the Corporate Financing Department's review of underwriting terms
and arrangements. Offerings filed with the Department are charged a fee
equal to $500 plus .01% of the gross dollar amount of the offering, not
to exceed a fee of $30,500. The ``gross dollar amount of the offering''
is the public offering price of all securities offered to the public
plus securities included in any overallotment option, the registration
price of securities to be paid to the underwriter and related persons,
and the registration price of any securities underlying other
securities. Subsection (b)(10)(B) to the Corporate Financing Rule and
Subsection 6(b) to Schedule A contain identical language stating that
when the number of securities being registered is modified by an
amendment to the initially filed documents, an additional amount of
filing fee may also be required. The Corporate Financing Department has
always calculated such additional filing fees by multiplying the number
of new or additional securities being registered by the proposed public
offering price, consistent with Rule 457 under the Securities Act of
1933, which sets forth the method of calculating SEC filing fees.\4\
---------------------------------------------------------------------------
\3\NASD Manual, (CCH) 1757.
\4\SEC Rule 457(a) states, in part, ``If the number of shares or
other units of securities, or the principal amount of debt
securities to be offered is increased by an amendment filed prior to
the effective date of the registration statement, an additional
filing fee, computed on the basis of the offering price of the
additional securities, shall be paid.'' 17 CFR 230.457.
---------------------------------------------------------------------------
Questions have arisen regarding the calculation of any additional
filing fee where the number of securities being offered is increased by
an amendment. The language of the Corporate Financing Rule and Schedule
A did not contemplate an amendment where the number of securities is
increased and the proposed public offering price is decreased,
resulting in no change in the gross dollar amount of the offering.
Thus, the proper calculation of an additional filing fee could be
unclear where, for example, a one million share offering at $10.00 per
share is amended to a two million share offering at $5.00 per share. In
such a situation, the existing rule language could be interpreted to
call for no additional fee since the gross dollar amount of the
offering is unchanged. The actual practice, however, is that an
additional fee is assessed based on the additional one million shares
multiplied by the new price of $5.00.
The NASD has determined that it is important to conform the
language of the Corporate Financing Rule and Schedule A to SEC Rule 457
to clarify the calculation of fees for securities which have been added
by amendment to the amount of securities being offered in the initial
filing documents. The proposed rule change amends subsection (b)(10)(B)
to section 44 to Article III of the Rules of Fair Practice and
subsection (b) to section 6 of Schedule A to clarify that the
calculation of the additional fee required as a result of additional
securities being offered pursuant to an amendment to the initially
filed documents shall be equal to .01% of the result of the number of
new shares being offered multiplied by the offering price of the new
shares.
Schedule E to the By-Laws
Subsection 3(c) to Schedule E to the NASD By-Laws states that if a
member proposes to underwrite, participate as a member of the
underwriting syndicate or selling group, or otherwise assist in the
distribution of a public offering of securities of members or
affiliates ``without limitation as to the amount of securities to be
distributed by the member,'' then one of three conditions must be met.
The conditions are that: (1) A qualified independent underwriter must
be engaged to establish the price and participate in the preparation of
the registration statement and the prospectus; or (2) the offering is
of a class of equity securities for which a bona fide independent
market exists; or (3) the offering is of a class of securities which is
rated as investment grade by Moody's, Standard & Poor's or some other
acceptable rating service.
The phrase ``without limitation as to the amount of securities to
be distributed by the member'' is a carryover from an early provision
of Schedule E, eliminated in 1988,\5\ that restricted a member's
participation in the syndicate or selling group to an amount not
exceeding 10% of the dollar amount of an offering underwritten on a
firm commitment basis and managed by a qualified independent
underwriter. At the time the restriction on participation was operable,
two qualified independent underwriters were required by Schedule E. If
the member's participation was limited to 10% or less, only one
qualified independent underwriter was required. The removal of the
restrictive provision renders the quoted phrase superfluous. The
proposed rule change amends subsection (c) to section 3 of Schedule E
to remove that part of the subsection which is superfluous and no
longer operable.
---------------------------------------------------------------------------
\5\Securities Exchange Act Release No. 25525 (March 29, 1988),
53 FR 11156 (April 5, 1988).
---------------------------------------------------------------------------
The NASD believes that the proposed rule change is consistent with
the provisions of section 15A(b)(5) of the Act,\6\ which require that
the rules of the Association provide for the equitable allocation of
reasonable dues, fees and other charges among members, and is also
consistent with the provisions of section 15A(b)(6) of the Act, which
require that the rules of the Association be designed to prevent
fraudulent and manipulative acts, promote just and equitable principles
of trade, and protect investors and the public interest, in that the
proposed rule change clarifies the correct calculation of a filing fee
on members, clarifies the requirement of members to provide detailed
documentation related to the modification of underwriting compensation
subsequent to the review and approval of such compensation by the NASD
and, finally, clarifies that when members issue, or participate in the
distribution of, any amount of their own securities or securities of an
affiliate, they must satisfy one of three options under subsection 3(c)
to Schedule E to the NASD By-Laws.
---------------------------------------------------------------------------
\6\15 U.S.C. 78o-3.
---------------------------------------------------------------------------
(B) Self-Regulatory Organization's Statement on Burden on Competition
The 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, as amended.
(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
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to the NASD, and in particular, sections 15A(b)
(5) and (6) of the Act. The Commission believes that the rule change,
which clarifies the requirement that members provide detailed
documentation concerning modifications in underwriting compensation
subsequent to the review and approval of such compensation by the NASD,
promotes just and equitable principles of trade and protects investors
and the public interest by ensuring compliance with the NASD's
Corporate Financing Rule in terms of fair and reasonable underwriting
terms and arrangements. In addition, the Commission believes that the
rule change protects investors and the public interest by clarifying
the correct calculation of filing fees for the NASD's review of
underwriting arrangements, and by clarifying members' obligations under
subsection 3(c) of Schedule E to the NASD By-Laws.
The Commission finds good cause for approving the rule change prior
to the thirtieth day after publication of the proposal in the Federal
Register. As indicated above, the Commission recognizes that the rule
change clarifies members' obligations under Schedules A and E to the
NASD By-Laws, and under the NASD's Corporate Financing Rule. The
Commission believes that accelerated approval will avoid unnecessary
delay in effectiveness of the rule change.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
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 will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to the file number in the caption
above and should be submitted by April 5, 1994.
It is therefore ordered, Pursuant to section 19(b)(2) of the Act,
that the proposed rule change SR-NASD-94-12 be, and hereby is approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5930 Filed 3-14-94; 8:45 am]
BILLING CODE 8010-01-M