[Federal Register Volume 64, Number 117 (Friday, June 18, 1999)]
[Notices]
[Pages 32907-32910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15484]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41519; File No. SR-NASD-99-02]


Self-Regulatory Organizations; Filing of Proposed Rule Change by 
National Association of Securities Dealers, Inc. Relating to the 
Application of Certain NASD Rules to Limited Offerings Under SEC Rule 
504, Securities Exempted Under the Securities Exchange Act of 1934, and 
Intra-State-Only Offerings

June 11, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 13, 1999, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly-owned subsidiary 
NASD Regulation, Inc. (``NASD Regulation''), filed with the Securities 
and Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by NASD Regulation. NASD Regulation amended the proposed 
rule change on May 24, 1999.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Suzanne Rothwell, Chief Counsel, Corporate 
Financing Department, NASD Regulation, to Joshua Kans, Attorney, 
Division of Market Regulation (``Division''), Commission, dated May 
21, 1999 (``Amendment No. 1''). Amendment No. 1 modified the 
proposed rule change to in response to the Commission's recent 
amendment of Securities Act Rule 504, See Securities Act Release No. 
7644 (February 25, 1999), 64 FR 11090 (March 8, 1999) (adopting 
amendment to Rule 504 under Regulation D, 17 CFR 230.504).
    The NASD and the Commission clarified the purpose of this 
proposed rule change, the scope of the rules impacted by the 
proposed rule change, and the NASD's response to the Commission's 
amendment of Securities Act Rule 504 during telephone conversations 
between Suzanne Rothwell, NASD Regulation, and Joshua Kans, 
Commission, on February 1, February 8, May 12 and June 10, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation is proposing to amend NASD Conduct Rules IM-2110-1, 
2710, and 2720 to clarify their application to offerings of securities 
made in reliance on the SEC's limited offering exemption provided by 
Rule 504 of Regulation D.\4\ The proposed amendments also would modify 
Rules 2710 and 2720 in other ways, and will affect the interpretation 
of several other NASD Rules. Below is the text of the proposed rule 
change. Proposed new language is in italics; proposed deletions are in 
brackets.
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    \4\ 17 CFR 230.504.
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* * * * *

IM-2110-1. ``Free-Riding and WIthholding''

* * * * *

(I) Explanation of Terms

    The following explanation of terms is provided for the assistance 
of members. Other words which are defined in the By-Laws and Rules 
shall, unless the context otherwise requires, have the meaning as 
defined therein.

(1) Public Offering

    The term public offering shall mean any primary or secondary 
distribution of securities made pursuant to a registration statement or 
offering circular including exchange offers, rights offerings, 
offerings made pursuant to a merger or acquisition, straight debt 
offerings, offerings pursuant to SEC Rule 504, and all other securities 
distributions of any kind whatsoever, except any offering made pursuant 
to an exemption from registration under Sections 4(1), 4(2) or 4(6) of 
the Securities Act of 1933, as amended, or pursuant to Rule 504 if the 
securities are ``restricted securities'' under SEC Rule 144(a)(3) 
[(unless considered a public offering in the states where offered)], 
Rule 505, or Rule 506 adopted under the Securities Act of 1933, as 
amended. The term public offering shall exclude exempted securities as 
defined in Section 3(a)(12) of the Act, and debt securities (other than 
debt securities convertible to common or preferred stock) and financing 
instrument-backed securities that are rated by a nationally recognized 
statistical rating organization in one of its four highest generic 
rating categories. The term public offering shall exclude secondary 
offerings by an issuer, or any security holder of the issuer, of 
actively-traded securities
* * * * *

[[Page 32908]]

2710. Corporate Financing Rule--Underwriting Terms and Arrangements

    (a) No change.
    (b) Filing Requirements
    (1)-(7) No change.
    (8) Exempt Offerings
    Notwithstanding the provisions of subparagraph (1) above, the 
following offerings are exempt from this Rule, Rule 2720, and Rule 
2810. Documents and information relating to the following offerings 
need not be filed for review:
    (A) securities exempt from registration with the Commission 
pursuant to the provisions of Sections 4(1), 4(2) or 4(6) of the 
Securities Act of 1933, as amended, or pursuant to Rule 504 [(unless 
considered a public offering in the states where offered)] if the 
securities are ``restricted securities'' under SEC Rule 144(a)(3), Rule 
505, or Rule 506 adopted under the Securities Act of 1933, as amended;
* * * * *
    (9) Offerings Required to be Filed
    Documents and information relating to all other public offerings 
including, but not limited to, the following must be filed with the 
Association for review:
    (A)-(C) No change.
    (D) securities exempt from registration with the Commission 
pursuant to Section 3(a)(11) of the Securities Act of 1933, as 
amended[, which is considered a public offering in the state where 
offered];
    (E) securities exempt from registration with the Commission 
pursuant to Rule 504 adopted under the Securities Act of 1933, as 
amended, [which is considered a public offering in the states where 
offered] unless the securities are ``restricted securities'' under SEC 
rule 144(a)(3);
* * * * *

2720. Distribution of Securities of Members and Affiliates--
Conflicts of Interest

    (a) General No change.
    (b) Definitions
    For purposes of this Rule, the following words shall have the 
stated meanings:
    (1)-(13) No change.
    (14) Public offering--any primary or secondary distribution of 
securities made pursuant to a registration statement or offering 
circular including exchange offers, rights offerings, offerings made 
pursuant to a merger or acquisition, straight debt offerings, offerings 
pursuant to SEC rule 504, and all other securities distributions of any 
kind whatsoever, except any offerings made pursuant to an exemption 
from registration under Sections 4(1), 4(2) or 4(6) of the Securities 
Act of 1933, as amended, or pursuant to SEC Rule 504 [(unless 
considered a public offering in the states where offered)] if the 
securities are ``restricted securities'' under SEC Rule 144(a)(3), SEC 
Rule 505, or SEC Rule 506 adopted under the Securities Act of 1933, as 
amended. The term public offering shall exclude exempted securities as 
defined in Section 3(a)(12) of the Act.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation 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. NASD Regulation 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

1. Purpose
    Background: The term ``public offering'' is expressly defined in 
two NASD Rules: the Free-Riding and Withholding Interpretation, Rule 
IM-2110-1, and the Conflicts-of-Interest Rule, Rule 2720.\5\ The 
definition of ``public offering'' found in Rule 2720 not only 
determines which offerings are subject to that rule, but also in part 
determines which offerings must be filed with the NASD for pre-offering 
review under the Corporate Financing Rule, Rule 2710, and the Direct 
Participation Programs Rule, Rule 2810.\6\ In addition, the NASD 
generally relies upon the definition in Rule 2720 to interpret the 
scope of other provisions of its rules that reference the term ``public 
offering'' or ``public offering price.'' \7\
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    \5\ The Free-Riding and Withholding Interpretation, Rule IM-
2110-1, requires NASD members and associated persons to make a bona 
fide public distribution, at the public offering price, of any 
securities of a public offering which trade at a premium in the 
secondary market when the secondary market begins.
    The Conflicts-of-Interest Rule, Rule 2720, governs the ability 
of NASD members and associated persons to participate in 
distributing a public offering of the securities of an NASD member, 
or to participate in distributing a public offering of the 
securities of a company with which the member and/or its associated 
persons, parent or affiliates has a conflict of interest.
    \6\ The Corporate Financing Rule, Rule 2710, prevents NASD 
members and associated persons from participating in the public 
offering of certain securities subject to Rules 2710, 2720 and 2810 
unless documents relating to the public offering are filed with the 
NASD for review, and the NASD provides an opinion that it has no 
objection to the proposed underwriting and other terms and 
arrangements. Rule 2710 also prevents NASD members and associated 
persons from participating in the public offering of subject 
securities if the underwriting or other terms or arrangements are 
unfair or unreasonable.
    The Direct Participation Programs Rule, Rule 2810, governs the 
ability of NASD members and associated persons to participate in the 
public offering of a direct participation program (a program which 
provides for flow-through tax consequences, such as a partnership).
    Rule 2710 explicitly incorporates the definitions contained in 
Rule 2720. See Rule 2710(a). Although Rule 2810 does not explicitly 
adopt those definitions, its scope is based on the scope of Rule 
2710.
    The definition of the term ``public offering'' included in the 
Free-Riding and Withholding Interpretation, Rule IM-2110-1, is 
limited to the application of that Interpretation. See Endnote 1 in 
NASD Notice to Members 98-48 (July 1998).
    \7\ See NASD Rules 0120(h) (general definition of ``fixed price 
offering''), 0120(p) (general definition of ``selling group''), 
0120(q) (general definition of ``selling syndicate''), 2750 
(transactions with related persons), 2830 (investment company 
securities), 3350 (short sale rule), 3370 (prompt receipt and 
delivery of securities) and 6410(e) (definition of ``initial public 
offering'' in NASD systems and programs rules). As a matter of 
policy, the NASD interprets those provisions in the context of Rule 
2720's definition of ``public offering.'' Those provisions do not 
specifically reference Rule 2720, however.
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    Currently, the definitions of ``public offering'' in IM-2110-1 and 
Rule 2720 include only offerings made in reliance on Securities Act 
Rule 504 if the offering is ``considered a public offering in the 
states where offered.'' Moreover, paragraphs (b)(8) and (9) of Rule 
2710 require the filing of Rule 504 offerings only under such 
circumstances. Also, because the scope of Rule 2810 is based on the 
scope of Rule 2710, Rule 2810 applies to Rule 504 offerings only under 
such circumstances.
    Proposed Rule Change: NASD Regulation proposes to amend the 
definition of ``public offering'' in IM-2110-1 and Rule 2720 to clarify 
that the definition encompasses all offerings of securities exempt from 
SEC registration under Securities Act Rule 504, except for Rule 504 
offerings of securities that would be deemed ``restricted securities'' 
under Securities Act Rule 144(a)(3).\8\ NASD Regulation further 
proposes that

[[Page 32909]]

Rules 2710(b)(8) and (9), which specify which offerings are exempt from 
Rule 2710 and which offerings are required to be filed under that rule, 
be amended to clarify that the Rule 2710 filing requirement applies to 
all Rule 504 offerings, except for offerings of securities that would 
be deemed Rule 144(a)(3) ``restricted securities.'' Accordingly, all 
Rule 504 offerings, other than offerings of securities that would be 
deemed Rule 144(a)(3) ``restricted securities,'' are to be subject to 
the requirements in Rules 2710, 2720, and 2810, as applicable. In 
addition, other provisions of NASD rules that refer to ``public 
offerings'' would be interpreted to include Rule 504 offerings, except 
for Rule 504 offerings of securities that would be deemed to be Section 
144(a)(3) ``restricted securities.''
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    \8\ Securities Act Rule 144(a)(3), 17 CFR 230.144(a)(3), defines 
the term ``restricted securities'' to include, inter alia, 
securities that are subject to resale restrictions under 17 CFR 
230.502(d) of Regulation D.
    The filing requirements of Rule 2720 are broader than and take 
precedence over those of Rule 2710. See NASD Rule 2710(b)(7) 
(describing offerings exempt from filing requirements ``unless 
subject to the provisions of Rule 2720''); 2720(n) (discussing 
``predominance'' of Rule 2720 provisions over any other provisions 
or interpretations of NASD by-laws or rules).
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    The Commission recently amended Rule 504.\9\ As amended, all Rule 
504 offerings are now subject to Rule 502(c) limitations on the manner 
of offering \10\ and to Rule 502(d) limitations on resale,\11\ unless 
the Rule 504 offering satisfies certain state law registration 
requirements or state law exemptions.\12\ Because Securities Act Rule 
144(a)(3) defines ``restricted securities'' to include securities 
subject to Rule 502(d) resale limitations, the scope of the term 
``restricted securities'' therefore would encompass all Rule 504 
offerings that do not satisfy the state law registration requirements 
or exemptions.
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    \9\ See Securities Act Release No. 7644 (February 25, 1999), 64 
FR 11090 (March 8, 1999).
    \10\ 17 CFR 230.502(c). Rule 502(c) prevents Regulation D 
offerings from being offered by any form of general solicitation or 
general advertising.
    \11\ 17 CFR 230.502(d). Rule 502(d) prevents securities acquired 
in Regulation D offerings from being resold without being registered 
under the Securities Act or being exempted from registration.
    \12\ See 17 CFR 230.504(b)(1).
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    The purpose of the proposed rule change is to apply IM-2110-1 and 
Rules 2710, 2720 and 2810 to those Rule 504 offerings that lack 
limitations on the manner of offering or limitations on resale, in a 
way that is consistent with the treatment of other types of ``exempt'' 
offerings, such as Regulation A offerings (which lack limitations on 
the manner of offering or limitations on resale, and are subject to IM-
2110-1 and Rules 2710, 2720 and 2810). NASD Regulation believes that it 
is appropriate to treat as ``public offerings'' all Rule 504 offerings 
that are not subject to limitations on the manner of offering or 
limitations on resale because those offerings share the characteristics 
of other public offerings.
    NASD Regulation also proposes other amendments to the definitions 
of ``public offering'' in Rules IM-2110-1 and 2720 to make them 
consistent and easier to read. Moreover, the proposed rule change would 
amend the definition of ``public offering'' in Rule 2720 to exempt 
securities that fall within Section 3(a)(12) of the Act's \13\ 
definition of ``exempted securities.'' Offerings of those securities 
already are exempt from Rule 2720, as well as Rules 2710 and 2810, 
pursuant to the language of Rule 2710(b)(8)(B).
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    \13\ 15 U.S.C. 78c(a)(12).
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    Finally, the proposed rule change would amend the provision in Rule 
2710(b)(9) to delete the language stating that an offering relying on 
Section 3(a)(11) of the Securities Act of 1933 \14\ (the ``intra-state 
exemption'') must be filed only when it is ``considered a public 
offering in the state where offered.'' The Association is proposing to 
eliminate this language so that Rule 2710(b)(9) is consistent with the 
definitions of ``public offering'' in IM-2110-1 and Rule 2720, which 
encompass all intra-state offerings exempt from SEC registration.\15\ 
Consequently, all Section 3(a)(11) securities offerings would be filed 
with the Corporate Financing Department for review.
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    \14\ 15 U.S.C. 77c(a)(11).
    \15\ The definitions of ``public offering'' in IM-2110-1 and 
Rule 2720 include ``all securities distributions of any kind 
whatsoever'' and do not exclude any type of intra-state offering.
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2. Statutory Basis
    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act \16\ in 
that clarification of whether offerings relying on Securities Act Rule 
504 are subject to Rule IM-2110-1, Rule 2710, Rule 2720, and Rule 2810 
(and are interpreted to be within the concept of ``public offering'' in 
other rules of the Association) will promote just and equitable 
principles of trade and will protect investors and the public. NASD 
Regulation further believes that the proposed rule change is consistent 
with the provisions of Section 15A(b)(2) of the Act \17\ in that the 
proposed rule change will promote compliance by members with the rules 
of the NASD that are applicable to, or reference, public offerings of 
securities. Moreover, amendments that make the filing requirement 
consistent for offerings exempt from filing under Section 3(a)(11) of 
the Securities Act and make the definitions in Rule 2720 more 
consistent with IM-2110-1 will promote just and equitable principles of 
trade, protect investors and the public, and enforce compliance by 
members with the rules of the NASD as required by Sections 15A(b)(2) 
and 15A(b)(6) of the Act.
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    \16\ 15 U.S.C. 78o-3(b)(6).
    \17\ 15 U.S.C. 78o-3(b)(2).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation 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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Chance 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
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 File No. SR-NASD-99-02 and should 
be submitted by July 9, 1999.


[[Page 32910]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-15484 Filed 6-17-99; 8:45 am]
BILLING CODE 8010-01-M