[Federal Register Volume 65, Number 68 (Friday, April 7, 2000)]
[Notices]
[Pages 18405-18407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-8490]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42601; File No. SR-NASD-99-74]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 by the National Association of 
Securities Dealers, Inc. Relating to an Exemption From NASD Conduct 
Rule 2710 for Closed-End Management Companies That Make Periodic 
Repurchases of Their Securities Under Rule 23c-3(b) of the Investment 
Company Act of 1940

March 30, 2000.
    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 December 20, 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 (``Commission'' or ``SEC'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by NASD Regulation. The Association filed an 
amendment to the proposed rule change on February 29, 2000, which 
Amendment entirely replaces and supersedes the initial proposal.\3\ On 
March 20, 2000, the Association filed Amendment No. 2.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See February 28, 2000 letter and attachments from Joan C. 
Conley, Secretary, NASD Regulation, Inc. to Katherine A. England, 
Assistant Director, Division of Market Regulation (``Division''), 
SEC (``Amendment No. 1''). In Amendment No. 1, NASD Regulation made 
changes to the language of the proposed new rule. Exhibits 2 through 
4 that were attached to the original filing are incorporated by 
reference in Amendment No. 1.
    \4\ See March 17, 2000 letter from Suzanne E. Rothwell, Chief 
Counsel, Corporate Financing, NASD Regulation, Inc. to Katherine A. 
England, Assistant Director, Division, SEC, (``Amendment No. 2''). 
Amendment No. 2 made minor technical changes to the proposal.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    NASD Regulation proposes to amend NASD Conduct Rules 2710 
(``Corporate Financing Rule'') and 2830 to exempt public offerings by 
closed-end investment management companies that make periodic tender 
offers for their securities in compliance with Rule 23c-3(b) \5\ of the 
Investment Company Act of 1940 \6\ (the ``1940 Act'') from the filing 
requirements and limitations on underwriting compensation of the 
corporate Financing Rule and, instead, subject such offerings to the 
sales charge limitations of NASD Conduct Rule 2830. Below is the text 
of the proposed rule change. Proposed new language is in italics; 
proposed deletions are in brackets.
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    \5\ 17 CFR 270.23c-3(b).
    \6\ 15 U.S.C. 80a.
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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)-(B) No Change.
    (C) securities of [investment companies registered under the 
Investment Company Act of 1940, as amended, except securities of a 
management company defined as a ``closed-end company'' in Section 
5(a)(2) of that Act] ``open-end'' investment companies as defined in 
Section 5(a)(1) of the Investment Company Act of 1940 and securities of 
any ``closed-end'' investment company as defined in Section 5(a)(2) of 
that Act that:
    (i) makes periodic repurchase offers pursuant to Rule 23c-3(b) 
under the Investment Company Act of 1940; and
    (ii) offers its shares on a continuous basis pursuant to Rule 
415(a)(1)(xi) under the Securities Act of 1933.
    (D)-(J) No change.
    (9)-(12) No change.
    (c)-(d) No change.
* * * * *

2830. Investment Company Securities

    (a)-(c) No change.
    (d) Sales Charge.
    No members shall offer or sell the shares of any open-end 
investment company, any Closed-end investment company that makes 
periodic repurchase offers pursuant to Rule 23c-3(b) under the 1940 Act 
and offers its shares on a continuous basis pursuant to Rule 
415(a)(1)(xi) under the Securities Act of 1933, or any ``single 
payment'' investment plan issued by a unit investment trust 
(collectively ``investment companies'') registered under the 1940 Act 
if the sales charges described in the prospectus are excessive. 
Aggregate sales charges shall

[[Page 18406]]

be deemed excessive if they do not conform to the following provisions:
    (1)-(5) No change.
    (e)-(i) No change.
    (j) Repurchase from Dealer.
    No member who is a principal underwriter of a security issued by an 
open-end [management] investment company or a closed-end investment 
company that makes periodic repurchase offers pursuant to Rule 23c-3(b) 
under the 1940 Act and offers its shares on a continuous basis pursuant 
to Rule 415(a)(1)(xi) under the Securities Act of 1933 shall repurchase 
such security, either as principal or as agent for the issuer, from a 
dealer acting as principal who is not a party to a sales agreement with 
a principal underwriter, nor from any investor, unless such dealer or 
investor is the record owner of the security so tendered for 
repurchase. No member who is a principal underwriter shall participate 
in the offering or in the sale of any such security if the issuer 
voluntarily redeems or repurchases its securities from a dealer acting 
as principal who is not a party to such a sales agreement nor from any 
investor, unless such dealer or investor is the record owner of the 
security so tendered for repurchase. Nothing in this paragraph shall 
relate to the compulsory redemption of any security upon presentation 
to the issuer pursuant to the terms of the security.
    Nothing in this Rule shall prevent any member, whether or not a 
party to a sales agreement, from selling any such security for the 
account of a record owner to the underwriter or issuer at the bid price 
next quoted by or for the issuer and charging the investor a reasonable 
charge for handling the transaction, provided that such member 
discloses to such record owner that direct redemption of the security 
can be accomplished by the record owner without incurring such charges.
    (k)-(n) No change.
* * * * *

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
    The Corporate Financing Rule regulates the underwriting terms and 
other arrangements of public offerings of securities. Subparagraph 
(b)(8)(C) of the Corporate Financing Rule provides that securities of 
investment companies registered under the 1940 Act \7\ are exempt from 
filing and compliance with the Corporate Financing Rule, unless the 
offering is of securities of a management company defined as a 
``closed-end'' company in Section 5(a)(2) \8\ of the 1940 Act \9\ 
(``closed-end funds''). \10\ Thus, closed-end funds are subject to the 
filing requirements, filing fees, and regulations of the Corporate 
Financing Rule. Open-end investment management companies (``open-end 
funds'') that continuously offer redeemable securities are exempt from 
filing with NASD Regulation under the Corporate Financing Rule and a 
member's receipt of their sales charges is regulated under NASD Conduct 
Rule 2830.
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    \7\ 15 U.S.C. 80a.
    \8\ 15 U.S.C. 80a-5(a)(2).
    \9\ 15 U.S.C. 80a.
    \10\ Section 5(a)(1) of the 1940 Act defines ``open-end 
company'' as ``a management company which is offering for sale or 
has outstanding any redeemable security for which it is the 
issuer.'' Section 5(a)(2) of the 1940 Act defines ``closed-end 
company'' as ``any management company other than an open-end 
company.'' 15 U.S.C. 80a-5(a)(1) and (2).
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    Closed-end funds are subject to the core provisions of the 1940 Act 
\11\ that also apply to open-end funds, including prohibitions on 
affiliated transactions, obligations requiring shareholder approval of 
advisory contracts, anti-pyramiding restrictions, and board composition 
requirements. However, such funds are not subject to other 1940 Act 
\12\ restrictions applicable to open-end funds, including limitations 
on leverage and obligations pertaining to the liquidity of investments. 
The Corporate Financing Rule and its predecessor rule have long been 
applied to members' sales of the securities of closed-end funds on the 
basis that closed-end fund offerings are structured and marketed in a 
manner that is more similar to and competitive with corporate 
securities offerings than to open-end funds. At the time the Corporate 
Financing Rule was adopted, closed-end funds conducted offerings of a 
fixed number of common shares at specified times; priced their shares 
periodically; limited sales compensation of broker/dealers to a 
discount from a fixed offering price; did not redeem their securities; 
and generally listed their securities on a securities market.
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    \11\ 15 U.S.C. 80a.
    \12\ Id.
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    Certain closed-end funds, commonly known as ``interval funds,'' 
have developed a hybrid structure in which they engage in continuous 
offerings of their securities under Rule 415 \13\ under the Securities 
Act of 1933; \14\ price their shares daily; pay broker/dealers initial 
and continuing compensation that meets the sales charge limitations of 
NASD Conduct Rule 2830; do not list their securities on a securities 
market; and redeem shares by making periodic self-tenders in compliance 
with Rule 23c-3(b) \15\ of the 1940 Act. \16\ Rule 23c-3(b) \17\ 
requires that the interval fund establish as a fundamental policy, 
changeable only by a majority vote of the outstanding voting securities 
of the company, that it will make periodic repurchase offers. Because 
the shares of interval funds are not redeemable on a daily basis, they 
are nonetheless classified as ``closed-end'' under the 1940 Act. \18\
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    \13\ 17 CFR 230.415.
    \14\ 15 U.S.C. 77a et seq.
    \15\ 17 CFR 270.23c-3(b).
    \16\ 15 U.S.C. 80a.
    \17\ 17 CFR 270.23c-3(b).
    \18\ 15 U.S.C. 80a.
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    In Notice to Members 98-81 (October, 1998), NASD Regulation 
requested public comment on whether any of the NASD's rules are 
obsolete. One commenter, the Investment Company Institute, proposed 
exempting interval funds from regulation by the Corporate Financing 
Rule. In addition, the Corporate Financing Department has received a 
rulemaking petition requesting an exemption from the Corporate 
Financing Rule for interval funds. NASD Regulation believes that the 
distribution of interval fund shares is conducted and financed in a 
manner more similar to that used by open-end management investment 
companies than the method used by traditional closed-end funds. 
Therefore, the calculation of members' compensation for the 
distribution of interval fund shares is more properly regulated by 
provision (d) of NASD Conduct Rule 2830 (provision (d) hereinafter, the 
``Sales Charge Rule''), rather than by the limitations on underwriting 
compensation in the Corporate Financing Rule.
    Consequently, NASD Regulation proposes to amend the Corporate 
Financing Rule and NASD Conduct Rule 2830 to exempt interval funds from 
the filing requirements, filing fees, and

[[Page 18407]]

regulations of the Corporate Financing Rule and to, instead, subject 
them to NASD Conduct Rule 2830, which regulates the distribution and 
sales charges of open-end funds.\19\ The proposed amendment to the 
Corporate Financing Rule would amend subparagraph (b)(8)(C) to provide 
that closed-end fund offerings are exempt if the fund makes periodic 
repurchase offers pursuant to Rule 23c-3(b) \20\ and it offers its 
shares on a continuous basis pursuant to Rule 415 \21\ under the 
Securities Act of 1933.\22\ Closed-end funds that do not meet these 
requirements will continue to be subject to the Corporate Financing 
Rule. The proposed amendment to NASD Conduct Rule 2830 would amend 
paragraphs (d) and (j) to provide that interval funds are subject to 
the provisions regulating sales charges and the repurchases of fund 
securities.\23\
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    \19\ Interval funds are distinguished from other hybrid closed-
end funds that make periodic self-tenders in compliance with Rule 
13e-4 and Schedule 13E-4 under the Act (``tender offer funds''). See 
17 CFR 240.13e-4 and 17 CFR 240.13e-101 et seq. Such tender offer 
funds are not required to establish as a fundamental policy that 
they will make periodic repurchases, as required by Rule 23c-3(b) 
under the 1940 Act. 17 CFR 270.23c-3(b), 15 U.S.C. 80a. The rule 
change proposed herein would not exempt tender offer funds from the 
Corporate Financing Rule. However, NASD Regulation will consider 
individual requests for exemption under the NASD Rule 9600 series 
from the requirements of the Corporate Financing Rule for such 
tender offer funds. See, Exemption granted October 29, 1999 under 
``Corporate Financing Rule--Rule 2710'' at www.nasd.com.
    \20\ 17 CFR 270.23c-3(b).
    \21\ 17 CFR 230.415.
    \22\ 15 U.S.C. 77a et seq.
    \23\ An interval fund that has received a ``no objections'' 
opinion from the Corporate Financing Department based upon 
representations that underwriting compensation will not exceed a 
certain amount will become subject to the Sales Charge Rule upon 
effectiveness of the proposed amendments, provided that the 
compensation limit has not already been met or exceeded. Any 
interval fund that has reached the applicable compensation limit 
under the Corporate Financing Rule shall remain subject to the 
requirements of the Rule until the fund files a post-effective 
amendment with the Commission registering additional securities.
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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,\24\ 
which requires, among other things, that the Association's rules must 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. NASD Regulation believes 
that the calculation of members' compensation for the distribution of 
interval fund shares is more properly regulated by the Sales Charge 
Rule, rather than by the limitations on underwriting compensation in 
the Corporate Financing Rule.
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    \24\ 15 U.S.C. 78o-3(b)(6).
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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, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    NASD Notice to Members 98-81 (October, 1998) requested comment on 
whether any NASD rules are obsolete. A copy of the comment letter 
received from the Investment Company Institute in response to the 
Notice that requested the amendments proposed herein was filed with the 
proposed rule change. A copy of a petition for rulemaking requesting 
the amendments proposed herein submitted by the law firm of Stradley 
Ronon Stevens & Young on behalf of Franklin/Templeton Distributors, 
Inc. was also attached to the proposed rule change.

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 NASD 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 number SR-NASD-99-74 and 
should be submitted by April 28, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-8490 Filed 4-6-00; 8:45 am]
BILLING CODE 8010-01-M