[Federal Register Volume 62, Number 176 (Thursday, September 11, 1997)]
[Notices]
[Pages 47857-47858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24137]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39021; File No. SR-NASD-97-45]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to 
Modifications to the Definition of Qualified Independent Underwriter

September 4, 1997.

I. Introduction

    On June 26, 1997, the National Association of Securities Dealers, 
Inc., (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``Commission'' or ``SEC'') pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 
19b-4 thereunder,\2\ a proposed rule change relating to modifications 
to the definition of ``qualified independent underwriter.'' The 
proposed rule change was published for comment in Securities Exchange 
Act Release No. 38833 (July 11, 1997), 62 FR 38333 (July 17, 1997). The 
Commission received no comments on the proposal. This order approves 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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II. Description of the Proposal

    NASD is proposing to amend Rule 2720, Distribution of Securities of 
Members and Affiliates--Conflicts of Interest, that regulates the 
conduct of offerings by members of their own securities, those of the 
member's parent, or an affiliate, and other offerings in which a member 
has a conflict of interest.
    When a member proposes to participate in the distribution of a 
public offering of its own or an affiliate's securities, or of 
securities of a company with which it otherwise has a conflict of 
interest, NASD Rule 2720 requires that the price at which an equity 
issue or the yield at which a debt issue is to be distributed to the 
public be established at a price no higher or a yield no lower than 
that recommended by a member acting as a ``qualified independent 
underwriter.'' The qualified independent underwriter must also 
participate in the preparation of the offering document and is expected 
to exercise the usual standards of due diligence in respect thereto. 
The participation of a qualified independent underwriter is intended to 
assure the public of the independence of the pricing and due diligence 
functions in a situation where a member is participating in an offering 
where the member has a conflict of interest.
    The NASD is proposing to delete the requirement that a qualified 
independent underwriter has had net income from operations of the 
broker/dealer entity or from the pro forma combined operations of 
predecessor broker/dealer entities, exclusive of extraordinary items, 
as computed in accordance with generally accepted accounting 
principles, in at least three of the five years immediately preceding 
the filing of the registration statement.

III. Discussion

    The Commission believes the NASD's proposed rule change is 
consistent with the Act, and specifically with Section 15A(b)(6) 
thereunder.\3\ Section 15A(b)(6) requires that the rules of a national 
securities association be designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in

[[Page 47858]]

securities, and to remove impediments to and perfect the mechanism of a 
free and open market.\4\
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    \3\ 15 U.S.C. 78o-3.
    \4\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    The NASD is proposing to delete the eligibility criteria contained 
in the definition of ``qualified independent underwriter'' in NASD Rule 
2720, which requires a qualified independent underwriter to have 
recorded net income in three of the five years immediately preceding 
the offering. Due to the important investor protections provided by 
qualified independent underwriters, the Commission agrees with the 
NASD's assessment that qualified independent underwriters should meet 
certain standards as prescribed by the NASD in Rule 2720, however, the 
Commission believes the requirement that a qualified independent 
underwriter have had net income in three of the previous five years 
immediately preceding an offering does not specifically indicate a 
member's ability to act as a qualified independent underwriter. The 
Commission believes that other factors, including a member's actual 
experience in underwriting, may be more significant in determining 
eligibility as a qualified independent underwriter. In its proposed 
rule change, the NASD noted that the Hearing Subcommittees of the 
NADS's Corporate Financing Committee have granted the majority of 
requests received seeking an exemption from the proposed qualified 
independent underwriter net income requirement, relying instead, on 
members' extensive underwriting experience managing or co-managing 
public offerings to compensate for any lack of ongoing profitability.
    The Commission recognizes that the net income requirement, in some 
instances, may serve as an effective measure for qualified independent 
underwriters. However, the Commission also notes that a deficiency in 
net income may be the result of various situations, many of which are 
not directly connected to the profitability of a member's underwriting 
activities. Indeed, in its filing, the NASD noted that one national 
broker-dealer failed the net income requirement due to its settlement 
of sales practice abuses in connection with the distribution of 
noncorporate securities, an activity unrelated to its ability to serve 
as a qualified independent underwriter.
    The Commission believes that the participation of a qualified 
independent underwriter assures the public of the independence of the 
pricing and due diligence functions in a situation where a member is 
participating in an offering where such member has a conflict of 
interest. Because of the important investor protections provided by 
qualified independent underwriters in such an instance, the Commission 
believes certain criteria must be met to assure the credibility of 
those acting as qualified independent underwriters. The Commission 
believes the elimination of the net income requirement is appropriate, 
as such requirement does not appropriately reflect a member's ability 
to act as a qualified independent underwriter. The Commission further 
believes the remaining standards provided in NASD Rule 2720 are more 
relevant in assessing a member's qualifications in the capacity as a 
qualified independent underwriter.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to the NASD, and in particular Section 15A(b)(6).
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\5\ that the proposed rule change (File No. SR-NASD-97-45) be and 
hereby is approved.
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    \5\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24137 Filed 9-10-97; 8:45 am]
BILLING CODE 8010-01-M