[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]


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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.
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    \1\NASD Manual, (CCH) 2200D.
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    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.
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    \2\But see Securities Exchange Act Release No. 33119 (October 
29, 1993), 58 FR 65084 (November 5, 1993).
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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\
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    \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.
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    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.
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    \5\Securities Exchange Act Release No. 25525 (March 29, 1988), 
53 FR 11156 (April 5, 1988).
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    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.
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    \6\15 U.S.C. 78o-3.
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(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