[Federal Register Volume 67, Number 72 (Monday, April 15, 2002)]
[Notices]
[Pages 18282-18285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9063]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45709; File No. SR-NASD-2001-46]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 Thereto by the National Association of Securities 
Dealers, Inc. Relating to Electronic Filings With the Corporate 
Financing Department

April 9, 2002.

I. Introduction

    On August 6, 2001, 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''), 
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 
amending NASD Conduct Rule 2710 to require electronic filings. The 
proposed rule change was published for comment in the Federal Register 
on August 24, 2001.\3\ NASD Regulation filed Amendment No. 1 to the 
proposed rule change on March 4, 2002.\4\ The Commission received three 
comments on the proposal. This order approves the proposal and issues 
notice of, and grants accelerated approval to, Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 44720 (August 17, 
2001), 66 FR 44657.
    \4\ Letter from Patrice M. Gliniecki, Vice President and Acting 
General Counsel, NASD Regulation, to Katherine A. England, Assistant 
Director, Division of Market Regulation, Commission, dated March 1, 
2002 (``Amendment No. 1''). Amendment No. 1 responds to the concerns 
of commenters and makes a minor clarification to proposed Rule 
2710(b)(6)(A)(vii).
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II. Description of the Proposal

    NASD Regulation is proposing to amend NASD Rule 2710(b)(6) to 
require members to file information required by subparagraph (b)(6) 
with the NASD Regulation's Corporate Financing Department 
(``Department'') through its electronic filing system, the Corporate 
Offerings Business Regulatory Analysis System (``COBRA'').\5\ The 
obligation to file information electronically would apply to all 
offerings subject to the rule's filing requirements, regardless of 
whether the offering is exempt from registration with the SEC or is 
submitted confidentially to the SEC for review.
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    \5\ On April 30, 2001, the Department deployed a web-based 
application of COBRA, which consists of an internal software 
application used by the Department and ``Web COBRADesk,'' a user 
interface that permits members and their counsel to file offerings 
of direct participation program securities.
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    NASD Regulation also is proposing to adopt new subparagraph 
(b)(5)(B) of Rule 2710 to provide that all documents that are filed 
with the SEC through the EDGAR system will be treated as filed with the 
Association. Members that do not file documents with the SEC through 
EDGAR would remain obligated to continue to submit multiple copies of 
any required documents in paper format. However, NASD Regulation is 
proposing to amend NASD Rule 2710(b)(5)(A)(ii) and (iii) to reduce the 
number of required copies of these documents from five to three.
    NASD Regulation has hosted several training sessions to provide 
opportunities for members and their counsel to learn how to file 
offerings using COBRA. In addition, NASD Regulation has stated that 
certain Department staff members are dedicated to assisting filers when 
they access and navigate the system. According to NASD Regulation, 
before and following Commission approval of the proposed rule change, 
the Department will provide additional training sessions and provide 
continuing support and assistance to members and their counsel who have 
questions and are unfamiliar with the system.
    NASD Regulation has stated that the NASD will publish a Notice To 
Members within 30 days of Commission approval announcing the proposed 
rule change and providing an effective date within 60 days of 
Commission approval.

III. Summary of Comments and NASD Regulation's Response

    The Commission received three comment letters on the proposed rule 
change.\6\ The commenters concerns with the proposal, and NASD 
Regulations response to these concerns, are summarized below.
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    \6\ Letter from Edward M. Alterman, Fried, Frank, Harris, 
Shriver & Jacobson (``Fried'') to Jonathan G. Katz, Secretary, 
Commission, dated September 24, 2001; Letter from Mark T. Lab, 
Simpson Thacher & Bartlett (``Simpson'') to Jonathan G. Katz, 
Secretary, Commission, dated October 1, 2001; and Letter from Martin 
R. Miller, Willkie Farr & Gallagher (``Wilkie'') to Jonathan G. 
Katz, Secretary, Commission, dated October 4, 2001 (collectively, 
the ``Commenters'').
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Increased Costs and Less Efficiency

    The Commenters were concerned that the mandatory use of COBRA 
generally would be more costly and less efficient than the current 
process of manual filings. NASD Regulation does not believe that these 
concerns are justified.
    NASD Regulation believes that mandatory COBRA filing will reduce 
overall costs and enhance the efficiency of the Department's operations 
in several important ways. Electronic filing eliminates the need for 
the Department to handle and process thousands of packages that 
otherwise would be sent through the U.S. Postal Service or other 
couriers. Additionally, direct electronic filing into COBRA eliminates 
the need for analysts to input data from paper filings into COBRA. 
Electronic filing also mitigates against the possibility that paper 
records will be lost, such as in the event of a catastrophe. Further, 
COBRA eliminates the need for members to file registration statements 
with the Department if they have been filed with the SEC using EDGAR. 
Filers simply need to provide the Department with the EDGAR accession 
number in the COBRA Basic Information. This feature reduces members' 
printing and delivery expenses. For these reasons, NASD Regulation 
believes that members can expect to receive a speedier review of their 
electronic filings under COBRA.
    The NASD states that the Department has worked with the legal 
community and NASD members for over four years to ensure that COBRA is 
as user-friendly and efficient as possible. NASD has three staff 
members available to train

[[Page 18283]]

members and their counsel on using the system and assist filers who are 
unfamiliar with the system with navigation and information reporting 
requirements. NASD Regulation upgraded the system to make it even more 
user-friendly and efficient. Most notably is the development of 
COBRADesk as a ``web-based'' interface. NASD Regulation is currently 
installing additional system upgrades that respond to users' comments 
on ways to improve the system. The Department and its vendor, 
Dealogic,\7\ are committed to making system improvements that are 
necessary to address filer comments and technological advances.
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    \7\ Dealogic (formerly CommScan, L.L.C.) is the third-party 
vendor that designed and developed (COBRADesk in June 1999 as a 
client application and as a Web application.
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    Willkie stated that there would be no need to make COBRA mandatory 
if it really saved costs. According to NASD Regulation, Willkie is 
presumably implying that filers would voluntarily use COBRA if it were 
less costly than the current system. NASD Regulation, however, does not 
agree with this assertion. Paper filings slow the review process for 
all filers because the Department must maintain and dedicate resources 
to redundant and inefficient paper filing procedures. Consequently, 
many of the benefits of the electronic system will not be realized 
unless all filers use it.
    Fried stated that the Commission's goal in requiring electronic 
filings with EDGAR is to make the filings publicly available more 
rapidly. By contrast, filings with the Department are confidential. 
Fried argued therefore, that there is no basis for the NASD to require 
electronic filings with the Department. NASD Regulation does not 
believe that electronic filings should only be mandated when the goal 
of the system is public dissemination. As noted in the notice of 
proposed rule change, there are many efficiencies in having all filings 
made with the Department electronically.

Information Required by the Electronic Filing System

    All of the Commenters objected to proposed NASD Rule 
2710(b)(6)(A)(vii), which would require a person filing information 
through COBRA to file ``any other information required by the 
Association's electronic filing system.'' NASD Regulation intended the 
provision to require all information required under NASD Rule 2710 to 
be filed exclusively through COBRA. NASD Regulation recognizes that, as 
drafted, the provision could be construed to allow the NASD to change 
the substance of what is required by Rule 2710 simply by making a 
program change to COBRA. To address this concern, NASD Regulation 
amended proposed Rule 2710 (b)(6)(A)(vii) to state ``any other 
information required to be filed under this Rule,'' to make clear that 
the electronic filing requirements are based upon the Rule and not the 
electronic filing interface.

Yes/No Boxes

    The Commenters expressed concern with the feature in COBRA that 
they believe requires filers to answer ``yes'' or ``no'' to questions 
requiring compliance with various provisions of NASD Rules 2710, 2720, 
or 2810. For instance, Fried and Simpson noted that certain questions 
may not apply to the types of offerings that are filed with the 
Department (e.g., a question about compliance with Rule 2810 when the 
offering does not involve direct participation program securities).
    NASD Regulation states that the questions serve as reminders to 
filers as they complete a submission. The COBRA system does not require 
that these buttons be checked; they are merely intended to be useful 
reminders of various regulatory requirements for members. Similarly, 
questions that do not apply to offerings of the type being filed are 
included so that members can navigate to proper screens on the Web 
site. NASD Regulation has not received similar complaints from other 
firms that routinely make electronic filings and believes the yes/no 
boxes serve as useful reminders to many filers.

Security

    The Commenters raised concerns regarding the security of 
information filed through COBRA. Fried and Simpson argued that no web-
based system is entirely safe from unauthorized access and is at least 
as vulnerable as the United States Government's highest level of 
security. Willkie noted that it is nearly impossible to guarantee the 
security of information transmitted on the Internet.
    NASD Regulation states that the COBRADesk system was designed by 
Dealogic and is internally maintained by Electronic Data Systems 
Corporation (``EDS''). The COBRADesk system is one of many web-based 
systems designed and built by Dealogic that routinely are used by the 
financial services industry.
    Web COBRADesk security features include: (i) Multiple Web server 
and standby database server to provide scalability and redundancy; (ii) 
servers housed at a secure data center run by EDS; (iii) multiple 
layers of security including multiple firewalls; (iv) integrated 
industry-standard Kerberos security; (v) users and firms authenticated 
at Web and database level; and (vi) all sessions between users and Web 
server protected by 128-bit encryption. EDS applies patches, runs 
systems through multiple testing stages, and does penetration testing.
    Further, while NASD Regulation recognizes that the security of 
information sent over the Internet is of critical importance, it notes 
that the information filed through COBRADesk tends to be less 
confidential and proprietary than other information members routinely 
send over the Internet, using systems that are designed by Dealogic. 
Moreover, over 200 members currently are sending or have sent 
information using COBRADesk,\8\ and the security of that information 
has not raised any concerns, before the comment letters received in 
response to the proposed rule change.
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    \8\ Thrity percent of the filings the Departmetn received in 
2001 were filed electronically.
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Required Information

    The Commenters also raised concerns regarding the provision that 
the system will not accept filings without certain specified 
information being provided, some of which typically is not known at the 
time of the initial filing with the SEC.\9\ For instance, Fried stated 
that the system will not accept a filing for an equity offering without 
the actual number of shares and price per share, numbers that are 
rarely known at the time of the initial SEC filing. Fried and Willkie 
argued that filers will be forced to insert incomplete or unreliable 
information merely to make a filing within the time required. Fried 
argued that the practitioner submitting the filing is forced to invent 
numbers and qualify them with general language disclaiming the accuracy 
of that information. Willkie added that filers would be forced to 
include a disclaimer on COBRA that the information was merely a ``best 
guess'' to be able to comply with the timing requirements of Rule 2710. 
Fried stated that COBRA demands the stock symbol, the information on 
affiliations and associations between the issuer and the underwriters 
and related persons, the SEC accession number, and a detailed analysis 
of the terms of the underwriting documents. Fried argued that the only 
viable alternative to providing the required information would be to 
provide unreliable or estimated

[[Page 18284]]

information and provide a disclaimer in the appropriate drop down box.
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    \9\ Pursueant to NASD Rule 2710(b)(4), the filing must be 
submitted to the Department no later than one business day after the 
filing of any such document with the SEC.
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    NASD Regulation received the same or similar comments in connection 
with the proposed amendments to NASD Rule 2710 that are pending at the 
SEC \10\ and during other meetings with members and their counsel to 
discuss process improvements and opportunities to improve efficiency 
and fairness in the filing system. The proposed amendments to Rule 2710 
include provisions that are intended to decrease the amount of 
information required to be filed with the NASD, where appropriate, 
particularly with regard to NASD association and affiliation. NASD 
Regulation notes, however, that electronic filing does not require any 
more or less information to be filed initially than the Department 
requires in connection with paper filings.
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    \10\ See Securities Exchange Act Release No. 42619 (April 4, 
2000), 65 FR 19409 (April 11, 2000) (SR-NASD-00-04).
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    Specifically, COBRA will accept filings without certain information 
being provided. There are five required fields in the system: (i) The 
filer's e-mail address; \11\ (ii) distribution method; \12\ (iii) 
accession number; \13\ (iv) compensation information; \14\ and (v) the 
number and value of the securities proposed to be offered.\15\ The 
stock symbol, the information regarding affiliation and association 
between the issuer and the underwriters and related persons, and a 
detailed analysis of the terms and arrangements of the underwriting 
agreements are not required fields.
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    \11\ The filer's e-mail address allows the Department to 
communicate with the filer.
    \12\ The information on distribution method is used to determine 
the amount of risk to be assumed by the participating members. The 
Department processes that information to calculate the maximum 
allowable compensation that a member may receive.
    \13\ The SEC accession number allows the staff a direct link to 
the documents through EDGAR.
    \14\ The Department reviews the amount of compensation paid to 
members in underwriting to ensure that the underwriting terms and 
arrangements in public offerings in which NASD members participate 
are fair and reasonable. To comply with this requirement, the 
Department must calculate the maximum allowable compensation a 
member may receive in connection with a public offering.
    \15\ Data on the price per share and the number of shares are 
needed to determine the offering proceeds, which are used to 
calculate the filing fee and compensation limits.
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    NASD Regulation notes that even in paper-based filings, members are 
required to submit a good faith estimate of the number of shares and 
the price per share if they do not have definitive information. NASD 
Regulation recognizes that this information may change while an 
offering is marketed.

Browser

    Fried stated that COBRA will not work when the filer uses Netscape 
Navigator, thereby forcing filers to use Internet Explorer. Simpson 
indicated that it had problems accessing the tutorial using Netscape, 
and it is concerned that only the most recent version of Internet 
Explorer works with COBRA.
    According to NASD Regulation, the browser standards for accessing 
COBRA are Netscape Navigator 4.6 or greater and Microsoft Internet 
Explorer 5.0 or greater. Browser upgrades are available free of charge 
at their respective Web sites. An application designed for the Web must 
be supported by the current browsers to ensure maximum performance, 
reliability, flexibility, privacy, and security. COBRA's layout, 
screens, dialog boxes, scroll bars, list boxes, grids, and links 
conform to the latest browser versions. It is virtually impossible to 
develop a system for the Web using the latest Web technology that 
interfaces with all older browser versions.
    NASD Regulation acknowledges that there are minor problems that 
complicate--but, in NASD's view, do not prevent--the use of Netscape 
Navigator when accessing the tutorial or Help screens. These areas will 
be corrected in the next maintenance release. The Department does not 
believe that these minimal technical requirements are costly or 
burdensome.

Corporate Financing Rule Amendments

    Fried and Simpson questioned the practicability and legality of 
requiring a practitioner to certify compliance with proposed NASD rules 
that are pending at the SEC. Willkie recommended that this proposed 
rule change be postponed until such time as the SEC approves other 
proposed amendments relating to Rule 2710 (File No. SR-NASD-00-04).
    Due to programming requirements and the time it would take to 
implement programming changes once the proposed amendments are adopted, 
when NASD Regulation ported COBRADesk to the Web in April 2001, NASD 
Regulation included data screens that can accept information regarding 
transactions that would meet one of the five exceptions proposed in the 
Rule amendments. COBRA, however, does not require certification of 
compliance with the proposed amendments, and it is within a filer's 
discretion whether to include information in the screens designed to 
capture information regarding transactions that meet the proposed 
exceptions.

IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities association. In particular, the Commission finds 
that the proposed rule change is consistent with section 15A(b)(6) of 
the Act,\16\ which requires that an Association's rules be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and to protect investors and the 
public interest.\17\
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    \16\ 15 U.S.C 78o-3.
    \17\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    Specifically, the Commission believes that the proposed rule change 
will greatly facilitate NASD Regulation's review of filings required by 
NASD Rule 2710. Moreover, the Commission does not believe that the 
proposal will place an undue burden on NASD members. The Commission 
notes that NASD Regulation has represented that three members of its 
staff will be available to train members and their counsel on using the 
system and assist filers who are unfamiliar with the system with 
navigation and information reporting requirements, which the Commission 
believes will minimize any burdens of the proposed rule change on NASD 
members. The Commission also notes that the provision of the proposal 
that eliminates the requirement to file paper copies of registration 
statements that have already been filed with the Commission through 
EDGAR should significantly reduce members' printing and delivery 
expenses related to corporate financing review by the Department. 
Finally, the Commission believes that NASD Regulation has adequately 
responded to the concerns of commenters.
    The Commission finds good cause for accelerating approval of 
Amendment No. 1 to the proposed rule change prior to the thirtieth day 
after publication in the Federal Register. The Commission notes that 
Amendment No. 1 responds to concerns of commenters and raises no new 
substantive issues. Accordingly, the Commission finds that good cause 
exists, consistent with sections 15A(b)(6) of the Act,\18\ and 19(b)(2) 
of the Act \19\ to accelerate approval of Amendment No. 1 to the 
proposed rule change.
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    \18\ 15 U.S.C 78o-3.
    \19\ 15 U.S.C. 78s(b)(2).

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V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether the amendment 
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 the 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-2001-46 and should be 
submitted by May 6, 2002.

VI. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-NASD-2001-46) is approved.
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-9063 Filed 4-12-02; 8:45 am]
BILLING CODE 8010-01-U