[Federal Register Volume 68, Number 249 (Tuesday, December 30, 2003)]
[Notices]
[Pages 75304-75306]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-32039]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48973; File No. SR-NASD-2003-190]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. To Interpret Two Provisions of New NASD Rule 
2790 Relating to Initial Public Offerings

December 22, 2003.
    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 19, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the NASD. The NASD has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. The Commission is publishing this amended 
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\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is filing with the Commission portions of a Notice to 
Members discussing the application of NASD Rule 2790. The NASD is not 
proposing any textual changes to the rules of NASD.

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

    In its filing with the Commission, the NASD 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. The NASD 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
    On October 24, 2003, the Commission approved new NASD Rule 2790 
(Restrictions on the Purchase and Sale of Initial Equity Public 
Offerings).\4\ As stated in the Commission approval order, NASD will 
publish a Notice to Members discussing the application of its Rule 
2790. In consulting with the Commission staff regarding the Notice, the 
Commission staff determined that two provisions in the Notice 
constitute interpretations of NASD Rule 2790 that,

[[Page 75305]]

due to their nature, should be filed as a proposed rule change.
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    \4\ See Securities Exchange Act Release No. 48701 (October 24, 
2003), 68 FR 62126 (October 31, 2003) (approving File No. SR-NASD-
99-60).
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    The first provision relates to paragraph (a)(4)(C) of Rule 2790, 
which provides an exclusion for ``purchases by a broker/dealer (or 
owner of a broker/dealer), organized as an investment partnership, of a 
new issue at the public offering price, provided such purchases are 
credited to the capital accounts of its partners in accordance with 
paragraph (c)(4).'' This exclusion is intended to allow a hedge fund 
that registers as a broker-dealer or that has a subsidiary that is a 
broker-dealer \5\ to purchase new issues on the same terms as other 
investment partnerships. For instance, pursuant to paragraph (a)(4)(C), 
a JBO hedge fund may purchase new issues so long as the beneficial 
interests of restricted persons do not exceed in the aggregate 10% of 
the fund. The NASD recognizes that there are a number of legal 
structures that a JBO hedge fund can take. Accordingly, the Notice will 
state:

    \5\ Certain hedge funds, or subsidiaries thereof, elect to 
become registered broker-dealers and share a back office with 
another broker-dealer. These entities are called joint back office 
broker-dealers (``JBOs'').
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    Paragraph (a)(4)(C) refers specifically to ``investment 
partnership'' because we understand this is the most common 
organizational form of JBO hedge funds. We believe, however, that 
the decision to organize as a limited liability company, or some 
other corporate form, should not undermine the relief granted to 
hedge funds organized as JBOs or with JBO subsidiaries.

    The second provision relates to the preconditions for sale in a 
fund-of-funds context. Paragraph (b) of Rule 2790 provides, in relevant 
part, that a member may not sell new issues to any account unless 
within the previous 12 months it has in good faith obtained a 
representation from either: (1) The beneficial owners of the account, 
or a person authorized to represent the beneficial owners of an 
account, that the account is eligible to purchase new issues in 
accordance with the rule; or (2) certain conduits (such as a bank, 
foreign bank, broker-dealer, or investment adviser) that all purchases 
of new issues are in compliance with the rule.
    In a fund-of-funds context, a member must obtain a representation 
only from a person authorized to represent the beneficial owners of the 
fund/account that purchases new issues directly from the member 
(``master fund''). However, in making such a representation, a 
representative of the master fund would need to ascertain the status of 
investors of any feeder funds that invest in the master fund. In 
ascertaining the status of investors of any feeder funds, the NASD will 
allow the representative of the master fund to rely on information from 
any feeder fund. To address the practicalities of the certification 
process, the Notice will state:

    While the Rule specifies that a member must verify the status of 
the master fund annually, the Rule does not specify a time period 
during which a master fund may rely on information from a feeder 
fund. NASD recognizes that logistical impracticalities may prevent 
all authorized representatives of feeder funds from verifying 
information at the same time as the representative of the master 
fund. Thus, NASD will allow the representative of a master fund to 
rely on information from any feeder fund that is no more than 12 
months old. Similarly, the representative of a feeder fund that in 
turn receives investments from other feeder funds may rely on 
information that is no more than 12 months old.

2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\6\ which requires, among other things, 
that the NASD's rules 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. The NASD believes that its Rule 2790, as described 
herein, protects investors and the public interest by: ensuring that 
members make a bona fide public offering of securities at the public 
offering price; ensuring that members do not withhold securities in a 
public offering for their own benefit or use such securities to reward 
certain persons who are in a position to direct future business to the 
member; and ensuring that industry ``insiders,'' including members and 
their associated persons, do not take advantage of their ``insider'' 
position in the industry to purchase new issues for their own benefit 
at the expense of public customers.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD 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 Change 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

    The NASD has designated the proposed rule change as ``non-
controversial'' pursuant to Section 19(b)(3)(A) of the Act \7\ and Rule 
19b-4(f)(6) thereunder.\8\ The NASD has represented that the proposed 
rule change: (1) Does not significantly affect the protection of 
investors or the public interest; (2) does not impose any significant 
burden on competition; and (3) does not become operative for 30 days 
after the date of this filing, or such shorter time as the Commission 
may designate if consistent with the protection of investors and the 
public interest. Rule 19b-4(f)(6) also requires the self-regulatory 
organization to give the Commission written notice of its intent to 
file the proposed rule change, along with a brief description and text 
of the proposed rule change, at least five business days prior to the 
date of filing of the proposed rule change, or such shorter time as 
designated by the Commission. The NASD fulfilled the five-day pre-
filing notice requirement.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(6).
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    The NASD has requested that the Commission waive the 30-day pre-
operative waiting period, which would make the proposed rule change 
operative immediately. The Commission believes that it is consistent 
with the protection of investors and the public interest to waive the 
30-day pre-operative period in this case because the proposed rule 
change provides additional guidance to investors regarding the 
application of NASD Rule 2790 and will facilitate the implementation of 
the new rule in the time frame described in the approval order.\9\ For 
these reasons, the Commission hereby waives the 30-day pre-operative 
period.\10\ Therefore, the proposal becomes operative immediately.
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    \9\ See supra note 4.
    \10\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

[[Page 75306]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2003-190 and should be submitted by January 20, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-32039 Filed 12-29-03; 8:45 am]
BILLING CODE 8010-01-P