[Federal Register Volume 59, Number 239 (Wednesday, December 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30709]


[[Page Unknown]]

[Federal Register: December 14, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35059; File No. SR-NASD-94-15]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by National Association of Securities Dealers, Inc. Relating to 
the NASD's Free-Riding and Withholding Interpretation

December 7, 1994.
    On March 18, 1994, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change 
pursuant to Section 19(b)(1)\1\ of the Securities Exchange Act of 1934 
(``Act''), and Rule 19b-4 thereunder.\2\ The proposed rule change 
amends the Free-Riding and Withholding Interpretation, an 
Interpretation of the NASD's Board of Governors under Article III, 
Section 1 of the Association's Rules of Fair Practice 
(``Interpretation'').\3\
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    \1\15 U.S.C. 78s(b)(1).
    \2\17 CFR 240.19b-4.
    \3\NASD Manual, Rules of Fair Practice, Art. III, Sec. 1 (CCH) 
2151.06.
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    Notice of the proposed rule change, together with the substance of 
the proposal, was provided by the issuance of a Commission release 
(Securities Exchange Act Release No. 34485, Aug. 3, 1994) and by 
publication in the Federal Register (59 FR 40933, Aug. 10, 1994). Four 
comment letters generally favoring the proposed rule change were 
received in response to the Commission release.\4\ This order approves 
the proposed rule change.
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    \4\See letter from Weil, Gotshal & Manges (``Weil'') to Jonathan 
G. Katz, Secretary, SEC, dated August 31, 1994; letter from James P. 
Dowd, Senior Vice President and Associate General Counsel, Paine 
Webber Incorporated (``Paine Webber'') to Jonathan G. Katz, 
Secretary, SEC, dated September 1, 1994; letter from Sullivan & 
Cromwell (``Sullivan'') to Jonathan G. Katz, Secretary, SEC, dated 
September 12, 1994; and letter from Daniel W. Sasaki, Vice President 
and Corporate Counsel, CS First Boston Corporation (``CSFB'') to 
Jonathan G. Katz, Secretary, SEC, dated September 14, 1994.
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I. Overview of the Free-Riding and Withholding Interpretation

    The purpose of the Interpretation is to protect the integrity of 
the public offering system by ensuring that members make a bona fide 
public distribution of ``hot issue'' securities and do not withhold 
such securities for their own benefit or use the securities to reward 
other persons who are in a position to direct future business to the 
member. Hot issues are defined by the Interpretation as securities of a 
public offering which trade at a premium in the secondary market 
whenever such trading commences. The Interpretation prohibits members 
from retaining the securities of hot issues in their own accounts and 
prohibits members from allocating such securities to directors, 
officers, employees and associated persons of members and other 
brokerdealers. It also restricts member sales of ``hot issue'' 
securities to the accounts of specified categories of persons, 
including among others, senior officers of banks, insurance companies, 
registered investment companies, registered investment advisory firms 
and any other persons within such organizations whose activities 
influence or include the buying or selling of securities. These basic 
prohibitions and restrictions are also made applicable to sales by 
members of hot issue securities to accounts in which any such persons 
may have a beneficial interest and, with limited exceptions, to members 
of the immediate family of those persons restricted by the 
Interpretation.
    In May 1992, the NASD Board of Governors appointed a special 
committee (the ``Committee'') to revisit the Interpretation to 
determine whether changes in securities markets called for amendments 
to the Interpretation's restrictions, definitions and obligations. The 
Committee also examined various interpretative issues that had been 
raised with the NASD.
    In June 1993, the NASD published for comment proposed modifications 
to the Interpretation based on its review and suggestions received. The 
NASD received 36 comment letters on the proposed modifications. The 
Committee considered the comments and made final recommendations to the 
National Business Conduct Committee (``NBCC'') in November 1993. The 
Board considered and approved the NBCC's recommendations in November 
1993.
    The proposed rule change includes language clarifications to 
facilitate understanding of the Interpretation's application, as well 
as substantive modifications.

II. Substantive Modifications

    The NASD proposed several substantive modifications to the 
Interpretation, including changes in connection with limited business 
broker-dealers, investment partnerships and corporations, stand-by 
arrangements, venture capital investors, securities offerings covered 
by the Interpretation, and issuer-directed securities. The substantive 
changes are intended to clarify the scope of the Interpretation and 
remedy certain unintended effects the Interpretation has had in its 
present form. Specifically, the NASD believes that the Interpretation 
has prohibited transactions which do not implicate the Interpretation's 
objective of a bona fide distribution of hot issue securities to the 
public, and may have created unduly burdensome restrictions and expense 
for NASD members and their customers. The substantive changes, 
described further below, are intended to restrict prohibited persons 
from receiving hot issues without engendering unintended restrictions 
inconsistent with the purpose of the Interpretation.

A. Stand-by Arrangements

    The Interpretation currently prohibits the sale of a hot issue to a 
group of stand-by purchasers if any purchaser is restricted under the 
Interpretation and has a beneficial interest in the stand-by account. 
This prohibition may affect the successful completion of an offering in 
which some of the offered securities are not otherwise purchased during 
the offering period. The NASD proposed to permit restricted accounts to 
purchase hot issue securities pursuant to a stand-by arrangement (i.e., 
an agreement to purchase securities not purchased during the offering 
period) under certain conditions. The Commission believes that the 
proposed conditions (prospectus disclosure, a formal agreement, absence 
of any other purchaser, and a three month holding period) will ensure 
that no NASD member will withhold such securities for its own benefit 
or use the securities to reward other persons who are in a position to 
direct future business to that member, while facilitating a bona fide 
distribution of the securities offered.\5\
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    \5\When the securities are sold by stand-by purchasers, the 
stand-by purchasers would need to comply with all applicable 
regulatory requirements including prospectus delivery pursuant to 
Section 5 of the Securities Act of 1933 (``Securities Act'') and 
Rule 10b-6 under the Act.
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B. Definition of Immediate Family

    The Interpretation presently restricts immediate family members of: 
(i) persons enumerated in Paragraph 2 (persons associated with broker-
dealers) (``absolutely restricted persons''); and (ii) Paragraphs 3 and 
4 of the Interpretation (persons having a connection to the offering 
and individuals related to banks, insurance companies and other 
institutional type accounts) (collectively, ``conditionally restricted 
persons'') from participating in hot issue distributions. The 
Interpretation defines immediate family members very broadly and 
includes such persons as father-, mother-, brother-in-law. An immediate 
family member of an absolutely restricted person is prohibited from 
purchasing hot issues to the same degree as the absolutely restricted 
person, unless it can be demonstrated that the absolutely restricted 
person does not contribute directly or indirectly to the support of the 
immediate family member. In the latter circumstance, the immediate 
family member of the absolutely restricted person may purchase a hot 
issue under the same conditions as conditionally restricted persons. 
Specifically, such persons may purchase hot issues if: (1) The 
securities were sold to such persons in accordance with their normal 
investment practice with the member making the distribution; and (2) 
the securities sold are insubstantial and not disproportionate in 
amount as compared to sales to members of the public and that the 
amount sold to any one such person is insubstantial.
    The Committee determined that in its present form, the immediate 
family member provisions often place inequitable restrictions on a 
person with a fairly attenuated connection to a restricted person named 
in the Interpretation (e.g., the sister-in-law of a bank vice-
president), and often result in unduly burdensome compliance 
difficulties for members monitoring whether such persons are restricted 
or become restricted. The modifications to the immediate family member 
provisions are intended to ensure that: (i) those persons with a 
substantial nexus to a restricted person will be similarly restricted 
under the Interpretation; (ii) NASD members may determine more easily 
whether such persons are restricted; and (iii) the Interpretation no 
longer will apply to persons not intended to be restricted.
    The modifications:
    (a) retain the investment history exemption, and expand it to 
include the use of investment history at firms other than the member 
making the allocation. The burden of obtaining such information will 
remain with the firm making the sale;
    (b) eliminate the immediate family restrictions on conditionally 
restricted persons and clarify that the Interpretation will apply only 
to conditionally restricted persons and to persons who are supported 
directly or indirectly to a material extent by that conditionally 
restricted person; and
    (c) with respect to absolutely restricted persons, continue to 
apply the immediate family restrictions to persons supported by the 
restricted individual and to allocations by the restricted individual's 
firm, but no longer will prohibit sales to non-support family members 
of an absolutely restricted person by a broker-dealer that does not 
employ the absolutely restricted person, where the absolutely 
restricted person has no ability to control the allocation of the hot 
issue.
    There will continue to be a violation if it can be determined that 
the restricted person has a beneficial interest in the account to which 
an allocation was made.

C. Venture Capital Investors

    The Committee determined that the Interpretation should permit bona 
fide venture capital investors to purchase a hot issue to maintain 
their percentage ownership in an entity, notwithstanding that the 
venture capital investor may be a restricted person, or that such 
person may have a beneficial interest in the venture capital account. 
Venture capital investors often play a pivotal role in the continued 
viability of an entity prior to its public offering. Therefore, such 
investors should be allowed to maintain their ownership interest after 
the entity completes its public offering.
    The venture capital investor, in order to purchase the hot issue 
without implicating the Interpretation's restrictions, must meet the 
following conditions:
    (a) One year of preexisting ownership in the entity;
    (b) No increase in the investor's percentage ownership above that 
held for the three months prior to the filing of a registration 
statement in connection with the initial public offering;
    (c) A lack of special terms in connection with the purchase; and
    (d) The venture capital investor cannot assign, sell, pledge, 
hypothecate or otherwise dispose of the securities for a period of 
three months following the effective date of the registration statement 
in connection with the offering.
    The conditions imposed on the venture capital investor are intended 
to ensure that the securities can be purchased by a bona fide venture 
capital investor who has had an on-going interest in an entity, and 
protect against any attempt to circumvent the Interpretation's 
restrictions by investing in an entity shortly before its public 
offering.

D. Investment Partnerships and Corporations

    The Interpretation generally disallows sales of a hot issue to an 
investment partnership or corporation, or similar account (``investment 
partnership'') if a restricted person has a beneficial interest in the 
entity. Thus, an investment partnership with several limited partners 
would be ``tainted'' due to the limited partnership interest of the 
restricted person. In August 1992 and October 1993 Notices to Members, 
the NASD announced it would allow investment partnerships, on an 
interim basis, to use a ``carve out'' mechanism to prevent restricted 
persons with an interest in an investment partnership from 
participating in hot issue allocations. This ``carve out'' mechanism 
requires the NASD member making such allocation to set up a separate 
account for these transactions and obtain from the investment 
partnership and its accountants documentation that indicates that the 
restricted persons are prevented from participating in a hot issue 
allocation.
    The carve-out methodology has been codified in the Interpretation. 
The NASD intends that the carve-out procedure not allow a person 
restricted under the Interpretation to receive a hot issue allocation 
inconsistent with the Interpretation's provisions without inequitably 
penalizing those not restricted under the Interpretation due to their 
interest in an investment partnership in which a restricted person also 
has an interest.\6\ The carve-out procedure will allow the limited 
partnership to purchase the hot issue by properly allocating the hot 
issue away from the restricted limited partner rather than restricting 
the whole limited partnership.
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    \6\A typical scenario is where a limited partnership with a 
large number of limited partners is restricted under the 
Interpretation because one of the limited partners is an officer of 
an insurance company, and therefore restricted under Paragraph 4 of 
the Interpretation.
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    In addition, the NASD is amending the Interpretation to provide 
that a beneficial interest, as defined under the Interpretation, will 
not be created by the receipt of a management fee based on the 
performance of an account. The Commission understands that investment 
partnerships and other similar accounts typically require that the 
management fee structure of such accounts include a performance-based 
component. Thus, an investment advisor restricted under Paragraph 4 of 
the Interpretation could restrict an entire investment partnership, in 
which no restricted persons have an interest, based solely on the 
investment advisor receiving a fee based on the performance of the 
securities in the investment partnership account. The Beneficial 
Interest provision of the Interpretation is intended to address those 
accounts in which a restricted person has a substantive, albeit not 
necessarily direct, ownership interest that should be appropriately 
restricted. The receipt of a performance-based fee, without the 
existence of any other beneficial interest, should not create such an 
interest.

E. Definition of Public Offering

    The Interpretation currently defines ``public offering'' to include 
virtually any and all distributions of securities, whether registered 
or unregistered under the Securities Act. The definition has imposed 
the Interpretation's restrictions on bona fide private placements of 
securities which do not present the potential abuses against which the 
Interpretation is intended to guard. The amendment will not apply the 
Interpretation to a traditional private placement of securities because 
such distributions generally are limited in scope and have holding 
periods placed on the privately placed securities, thereby limiting the 
potential for restricted persons to purchase the securities and resell 
or ``flip'' them in a short period of time.

F. Associated Person Definition

    Article I, Section (m) of the NASD By-Laws defines a ``person 
associated with a member'' to include a partner of a broker-dealer and 
any person who is directly or indirectly controlling or controlled by 
such member, whether or not such person is registered with the 
Association. A certain degree of confusion exists as to the status of 
passive investors in broker-dealers, such a broker-dealer limited 
partners, equity owners, or subordinated lenders.
    Certain passive investors lack the necessary element of control. 
Therefore, the Interpretation has been amended to provide that a person 
who owns or has contributed 10% or less to a broker-dealer's capital 
should not be construed to be an associated person if: (i) such 
ownership interest is a passive investment; (ii) the person does not 
receive hot issues from the member in which she has the interest; and 
(iii) the broker-dealer is not in a position to direct hot issues to 
the person. These conditions are intended to prevent such persons from 
attempting to use their ownership interests in a broker-dealer to 
effect the purchase of hot issues, and circumvent the Interpretation's 
objective of a bona fide distribution of a hot issue.

G. Persons Associated With Limited Business Broker-Dealers

    Certain broker-dealers transact a securities business that is 
limited to direct participation programs or investment company/variable 
product securities. Persons associated with such limited broker-dealers 
are not in a position to sell, distribute, or withhold hot issue 
securities. The Interpretation has been amended to recognize that such 
persons would not be in a position to inhibit a bona fide distribution 
of a hot issue security. Specifically, the Interpretation has been 
modified so that persons associated with broker-dealers whose business 
is limited to direct participation programs or investment company/
variable product securities are not restricted under the Interpretation 
to the same extent as those persons associated with broker-dealers with 
a more comprehensive securities business. The modification applies only 
to a person associated with such a limited broker-dealer, and not to 
the broker-dealer itself, as it is inappropriate for any NASD member to 
purchase a hot issue security for its own account, regardless of the 
extent of its securities business.

H. Issuer Directed Securities

    Presently, an employee of an issuer, who also is restricted under 
the Interpretation, must receive permission from the NASD Board of 
Governors in order to purchase hot issue securities of its employer, if 
the employee does not have the requisite investment history with the 
NASD member making the securities distribution. For example, an 
employee of a manufacturing company who is married to the senior 
officer of a bank would be restricted under the Interpretation because 
he or she is the immediate family member of a restricted person under 
Paragraph 3 of the Interpretation. Under the proposed changes to 
Paragraph 3 of the Interpretation, the employee would still be 
restricted if the senior officer of the bank directly or indirectly 
supports the employee. If permission is granted by the Board of 
Governors, the employee is allowed to purchase the securities of the 
employer without meeting the investment history requirement, but the 
amount purchased would still have to meet the insubstantial and not 
disproportionate tests described above.
    Issuer-directed share programs are viewed as a valuable tool in 
employee development and retention, and are not likely to pose the risk 
of members using these securities to reward other persons who are in a 
position to direct future business to the member. Thus, the 
modifications to the Issuer Directed Securities section of the 
Interpretation will allow employees of issuers to purchase hot issue 
securities of the employer under the same terms and conditions as 
persons associated with NASD members are permitted in connection with 
purchases of securities issued by the member, pursuant to an exemption 
provided in Section 13 of Schedule E to the NASD's By-Laws.

I. Cancellation Safe Harbor

    It will not be a violation if a NASD member makes an allocation of 
a hot issue to a restricted person or account, so long as the member 
cancelled the trade and reallocated the security at the public offering 
price to an unrestricted account, prior to T+1 of the initial 
transaction. The clarification is intended to remedy concerns caused by 
inadvertent violations of the Interpretation that are corrected by the 
NASD member making the distribution. Sales following cancellation would 
need to be made in compliance with applicable laws, including section 5 
of the Securities Act.
    Whether a particular cancellation and reallocation for purposes of 
compliance with the Interpretation will raise an issue under Rule 10b-6 
will depend upon the facts and circumstances involved in that 
cancellation and reallocation. For purposes of Rule 10b-6, a 
distribution includes ``the entire process by which in the course of a 
public offering the block of securities is dispensed and ultimately 
comes to rest in the hands of the investing public.''\7\ Thus, a 
distribution continues if a broker-dealer withholds any part of an 
offering in proprietary or nominee accounts and later sells those 
securities to the public after secondary trading has begun.\8\ However, 
a cancellation of a bona fide purchase order will not reopen the 
distribution where there is no reason for the underwriter to believe 
that the purchase order would be cancelled.\9\
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    \7\R.A. Holman & Co. v. SEC, 366 F.2d 446, 449 (2d Cir. 1966), 
modified on other grounds, 377 F.2d 665 (2d Cir. 1966), cert. 
denied, 389 U.S. 991 (1967).
    \8\Wall Street West, Inc, 47 S.E.C. 1003, 1005 (1984).
    \9\Cf. Id.
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III. Comments

A. Investment Partnerships

    Weil, Sullivan and CSFB believe that the carve-out methodology 
proposed by the NASD remains unduly restrictive. Weil argues that the 
proposal is unduly restrictive with respect to those investment 
partnerships in which conditionally restricted persons hold beneficial 
interests. Weil notes that members may sell directly to conditionally 
restricted persons if such sales are made in conformity with the 
investment history exemption. Weil suggests that members be permitted 
to sell hot issues to investment partnerships in which conditionally 
restricted persons hold beneficial interests if the sales conform to 
the normal investment practice of the investment partnership and such 
sales meet the ``insubstantial'' and ``not disproportionate'' tests.
    The NASD notes that it interprets the Interpretation to permit 
sales to investment partnerships or corporations in which conditionally 
restricted persons with the requisite investment history have a 
beneficial interest if the member can demonstrate that the percentage 
ownership of the hot issue security attributable to the conditionally 
restricted person is not greater than the amount that that person would 
have been allowed to purchase directly.\10\ The Commission believes 
that this interpretation ensures that conditionally restricted persons 
are not treated less favorably if they hold an indirect interest in a 
hot issue purchased by an investment partnership than they are if they 
directly purchase a hot issue.
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    \10\See Letter from T. Grant Callery, Vice President and General 
Counsel, NASD, to Mark P. Barracca, Branch Chief, Over-the-Counter 
Regulation, SEC, dated November 10, 1994.
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    Weil also suggests that the Interpretation permit an investment 
partnership that has created a ``hot issue'' to ``journal'' securities 
in the hot issue account to the regular account upon completion of the 
offering. Weil states that such a transfer of accounts, after the 
completion of the distribution of the issue, would have no bearing upon 
the adequacy of the distribution to the public. Sullivan suggests that 
the NASD dispense with the ``hot issue'' account entirely, instead 
permitting investment funds to segregate new issue purchases on their 
internal records.
    The NASD believes that such a mechanism would make it unnecessarily 
difficult to enforce compliance with the carve-out provisions. The 
Commission notes that the carve-out mechanism is not necessary when no 
conditionally restricted person would obtain an interest in a hot issue 
that is greater than the amount that that person would have been 
allowed to purchase directly. Therefore, the Commission agrees that a 
journaling mechanism is not necessary.
    Sullivan also argues that the NASD should permit restricted persons 
who manage investment partnerships to maintain a de minimis equity 
investment in the managed entities. It argues that federal tax laws 
require a general partner to keep a specified minimum interest in the 
partnership in order to ensure that it qualifies for taxation as a 
partnership under the Internal Revenue Code. It also argues that the 
NASD proposes to permit managers to accept performance fees, which 
often will greatly exceed any amounts that a manager may earn from its 
de minimis investment.
    The NASD responds that the Committee that reviewed the 
Interpretation explored various de minimis provisions and determined 
that: (i) any de minimis amount necessarily would be an arbitrary 
figure; and (ii) monitoring accounts to ensure compliance with a de 
minimis provision would be difficult.
    The Commission acknowledges that on many occasions, performance 
fees will greatly exceed any amounts that a manager may earn from its 
de minimis investment. However, the Commission agrees with the NASD 
that de minimis provisions are arbitrary and that monitoring accounts 
to ensure compliance would be difficult.\11\
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    \11\The Commission notes that a partnership is not the only 
structure that permits flow-through tax treatment.
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    Sullivan and CSFB argue that the NASD should permit absolutely 
restricted persons to hold a de minimis indirect financial interest in 
an investment partnership without triggering the ``carve out'' 
requirement. Sullivan and CSFB argue that it is possible for an 
absolutely restricted person to have an indirect beneficial interest in 
an investment partnership because the person is an officer of a member 
affiliated with the general partner of the partnership and may benefit 
from the partnership's performance solely by virtue of his status as a 
shareholder of an entity which owns the member and which receives a 
portion of the profits allocated to the general partner.
    The NASD objects to this de minimis proposal for the same reasons 
that it objected to the other de minimis proposals, namely: (i) any de 
minimis amount necessarily would be an arbitrary figure; and (ii) 
monitoring accounts to ensure compliance with a de minimis provision 
would be difficult.
    The Commission notes that the NASD has justified the payment of 
performance-based fees because such fees are not deemed to be the 
substantive, albeit not necessarily direct ownership, interest that the 
Interpretation is intended to restrict. The examples used by Sullivan 
and CSFB also present interests which are not substantive. However, not 
all such situations may be as innocuous as those posed by Sullivan and 
CSFB. The Commission agrees with the NASD that de minimis guidelines 
are arbitrary and that monitoring accounts to ensure compliance would 
be difficult.

B. Application of Interpretation to Offerings of Straight Debt 
Securities

    PaineWebber and Sullivan argue that the Interpretation should not 
apply to investment-grade straight-debt securities, because the manner 
in which they trade would make it impossible for a restricted person to 
earn a free-riding premium at the expense of public investors. 
PaineWebber states that investment-grade debt is priced relative to the 
interest rate of U.S. Treasury securities of comparable maturity. Both 
state that such securities are considered fungible with other non-
convertible securities with comparable economic terms and credit 
ratings. Alternatively, PaineWebber suggests that the Interpretation 
apply to such securities only in those instances in which there has 
been a material narrowing in yield spread versus the comparable 
maturity U.S. Treasury security between the initial offering yield 
spread and the yield spread when the issue is freed to trade in the 
secondary market.
    The NASD states that PaineWebber and Sullivan have raised 
legitimate concerns regarding the treatment of investment-grade 
straight-debt securities and that the NBCC should revisit the issue. 
However, it believes that these issues can be addressed in another 
proposed rule change. The Commission agrees that consideration of these 
comments should not delay implementation of the beneficial 
modifications contained in this proposed rule change.

C. Application of Interpretation to Offerings of Equity Securities for 
Which a Secondary Trading Market Exists

    Sullivan suggests that the Interpretation should not apply to most 
common stock offerings by issuers whose common stock is currently 
listed on a national securities exchange or traded over-the-counter, 
because the stock already is traded publicly and the public offering 
price will reflect the stock's market price. It suggests that the 
Interpretation should apply only in those instances when the public 
offering price reflects a discount greater than a specified percentage 
from the closing price on the pricing date or when the stock has become 
hot for a reason other than increased demand for the issuer's stock 
generally.
    The NASD states that Sullivan has raised legitimate concerns 
regarding the treatment of equity securities for which a secondary 
trading market exists and that the NBCC should revisit the issue. 
However, it believes that these issues can be addressed in another 
proposed rule change. The Commission agrees that consideration of these 
comments also should not delay implementation of the beneficial 
modifications contained in this proposed rule change.

D. Definition of Public Offering

    Sullivan also suggests that the definition of ``public offering'' 
for purposes of the Interpretation expressly exclude offerings made in 
reliance on Rule 144A and should exclude ``exchange offers'' and 
``offerings made pursuant to a merger or acquisition.''
    The NASD states that it interprets the Interpretation not to apply 
to offerings made in reliance on Rule 144A. In addition, it states that 
it does not apply the Interpretation to ``exchange offers'' and 
``offerings made pursuant to a merger or acquisition'' but to other 
distributions made in connection with these types of offerings.

IV. Discussion

    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, the requirements 
of Section 15A(b)(6) of the Act.12 Section 15A(b)(6) requires, 
inter alia, that the NASD's rules be designed to prevent fraudulent and 
manipulative acts, promote just and equitable principles of trade, and 
protect investors and the public interest. The Commission believes that 
the amendments to the Interpretation further the goals of Section 
15A(b)(6) because the amendments ensure that the Interpretation will 
continue to prohibit those transactions which present an undue risk 
that a member will withhold ``hot issue'' securities for its own 
benefit or use the securities to reward other persons who are in a 
position to direct future business to the member. At the same time, the 
Commission believes that the amendments will permit certain 
transactions that the Interpretation previously prohibited, but which 
do not pose a risk of undercutting the Interpretation's objective of a 
bona fide distribution of hot issue securities to the public. The 
Commission finds that the proposed rule change will facilitate the 
capital raising process by removing restrictions and compliance burdens 
imposed by the Interpretation with respect to certain transactions 
where application of the Interpretation does not enhance investor 
protection or the public interest, e.g., stand-by purchasers, venture 
capital investors and issuer-directed transactions). The Commission 
also finds that the changes in the definition of immediate family and 
associated person ensure that the Interpretation continues to apply to 
those allocations which are likely to benefit the member or are likely 
to be used as a quid pro quo for persons in a position to direct future 
business to the member, while permitting allocations to categories of 
persons who are not likely to direct future business to the member. 
Finally, the Commission recognizes that the Interpretation will 
continue to prohibit or restrict certain transactions which are not 
likely to conflict with the objective of the transaction. However, the 
Commission believes that permitting those transactions would pose an 
undue risk that the NASD will be unable to effectively monitor 
compliance with the Interpretation. Therefore, the Commission believes 
that the Interpretation should continue to apply on a prophylactic 
basis to these categories of transactions.
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    \1\215 U.S.C. 78o-3.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that File No. SR-NASD-94-15 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. 94-30709 Filed 12-13-94; 8:45 am]
BILLING CODE 8010-01-M