[Federal Register Volume 59, Number 239 (Wednesday, December 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30709]
[[Page Unknown]]
[Federal Register: December 14, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35059; File No. SR-NASD-94-15]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by National Association of Securities Dealers, Inc. Relating to
the NASD's Free-Riding and Withholding Interpretation
December 7, 1994.
On March 18, 1994, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change
pursuant to Section 19(b)(1)\1\ of the Securities Exchange Act of 1934
(``Act''), and Rule 19b-4 thereunder.\2\ The proposed rule change
amends the Free-Riding and Withholding Interpretation, an
Interpretation of the NASD's Board of Governors under Article III,
Section 1 of the Association's Rules of Fair Practice
(``Interpretation'').\3\
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\1\15 U.S.C. 78s(b)(1).
\2\17 CFR 240.19b-4.
\3\NASD Manual, Rules of Fair Practice, Art. III, Sec. 1 (CCH)
2151.06.
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Notice of the proposed rule change, together with the substance of
the proposal, was provided by the issuance of a Commission release
(Securities Exchange Act Release No. 34485, Aug. 3, 1994) and by
publication in the Federal Register (59 FR 40933, Aug. 10, 1994). Four
comment letters generally favoring the proposed rule change were
received in response to the Commission release.\4\ This order approves
the proposed rule change.
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\4\See letter from Weil, Gotshal & Manges (``Weil'') to Jonathan
G. Katz, Secretary, SEC, dated August 31, 1994; letter from James P.
Dowd, Senior Vice President and Associate General Counsel, Paine
Webber Incorporated (``Paine Webber'') to Jonathan G. Katz,
Secretary, SEC, dated September 1, 1994; letter from Sullivan &
Cromwell (``Sullivan'') to Jonathan G. Katz, Secretary, SEC, dated
September 12, 1994; and letter from Daniel W. Sasaki, Vice President
and Corporate Counsel, CS First Boston Corporation (``CSFB'') to
Jonathan G. Katz, Secretary, SEC, dated September 14, 1994.
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I. Overview of the Free-Riding and Withholding Interpretation
The purpose of the Interpretation is to protect the integrity of
the public offering system by ensuring that members make a bona fide
public distribution of ``hot issue'' securities and do not withhold
such securities for their own benefit or use the securities to reward
other persons who are in a position to direct future business to the
member. Hot issues are defined by the Interpretation as securities of a
public offering which trade at a premium in the secondary market
whenever such trading commences. The Interpretation prohibits members
from retaining the securities of hot issues in their own accounts and
prohibits members from allocating such securities to directors,
officers, employees and associated persons of members and other
brokerdealers. It also restricts member sales of ``hot issue''
securities to the accounts of specified categories of persons,
including among others, senior officers of banks, insurance companies,
registered investment companies, registered investment advisory firms
and any other persons within such organizations whose activities
influence or include the buying or selling of securities. These basic
prohibitions and restrictions are also made applicable to sales by
members of hot issue securities to accounts in which any such persons
may have a beneficial interest and, with limited exceptions, to members
of the immediate family of those persons restricted by the
Interpretation.
In May 1992, the NASD Board of Governors appointed a special
committee (the ``Committee'') to revisit the Interpretation to
determine whether changes in securities markets called for amendments
to the Interpretation's restrictions, definitions and obligations. The
Committee also examined various interpretative issues that had been
raised with the NASD.
In June 1993, the NASD published for comment proposed modifications
to the Interpretation based on its review and suggestions received. The
NASD received 36 comment letters on the proposed modifications. The
Committee considered the comments and made final recommendations to the
National Business Conduct Committee (``NBCC'') in November 1993. The
Board considered and approved the NBCC's recommendations in November
1993.
The proposed rule change includes language clarifications to
facilitate understanding of the Interpretation's application, as well
as substantive modifications.
II. Substantive Modifications
The NASD proposed several substantive modifications to the
Interpretation, including changes in connection with limited business
broker-dealers, investment partnerships and corporations, stand-by
arrangements, venture capital investors, securities offerings covered
by the Interpretation, and issuer-directed securities. The substantive
changes are intended to clarify the scope of the Interpretation and
remedy certain unintended effects the Interpretation has had in its
present form. Specifically, the NASD believes that the Interpretation
has prohibited transactions which do not implicate the Interpretation's
objective of a bona fide distribution of hot issue securities to the
public, and may have created unduly burdensome restrictions and expense
for NASD members and their customers. The substantive changes,
described further below, are intended to restrict prohibited persons
from receiving hot issues without engendering unintended restrictions
inconsistent with the purpose of the Interpretation.
A. Stand-by Arrangements
The Interpretation currently prohibits the sale of a hot issue to a
group of stand-by purchasers if any purchaser is restricted under the
Interpretation and has a beneficial interest in the stand-by account.
This prohibition may affect the successful completion of an offering in
which some of the offered securities are not otherwise purchased during
the offering period. The NASD proposed to permit restricted accounts to
purchase hot issue securities pursuant to a stand-by arrangement (i.e.,
an agreement to purchase securities not purchased during the offering
period) under certain conditions. The Commission believes that the
proposed conditions (prospectus disclosure, a formal agreement, absence
of any other purchaser, and a three month holding period) will ensure
that no NASD member will withhold such securities for its own benefit
or use the securities to reward other persons who are in a position to
direct future business to that member, while facilitating a bona fide
distribution of the securities offered.\5\
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\5\When the securities are sold by stand-by purchasers, the
stand-by purchasers would need to comply with all applicable
regulatory requirements including prospectus delivery pursuant to
Section 5 of the Securities Act of 1933 (``Securities Act'') and
Rule 10b-6 under the Act.
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B. Definition of Immediate Family
The Interpretation presently restricts immediate family members of:
(i) persons enumerated in Paragraph 2 (persons associated with broker-
dealers) (``absolutely restricted persons''); and (ii) Paragraphs 3 and
4 of the Interpretation (persons having a connection to the offering
and individuals related to banks, insurance companies and other
institutional type accounts) (collectively, ``conditionally restricted
persons'') from participating in hot issue distributions. The
Interpretation defines immediate family members very broadly and
includes such persons as father-, mother-, brother-in-law. An immediate
family member of an absolutely restricted person is prohibited from
purchasing hot issues to the same degree as the absolutely restricted
person, unless it can be demonstrated that the absolutely restricted
person does not contribute directly or indirectly to the support of the
immediate family member. In the latter circumstance, the immediate
family member of the absolutely restricted person may purchase a hot
issue under the same conditions as conditionally restricted persons.
Specifically, such persons may purchase hot issues if: (1) The
securities were sold to such persons in accordance with their normal
investment practice with the member making the distribution; and (2)
the securities sold are insubstantial and not disproportionate in
amount as compared to sales to members of the public and that the
amount sold to any one such person is insubstantial.
The Committee determined that in its present form, the immediate
family member provisions often place inequitable restrictions on a
person with a fairly attenuated connection to a restricted person named
in the Interpretation (e.g., the sister-in-law of a bank vice-
president), and often result in unduly burdensome compliance
difficulties for members monitoring whether such persons are restricted
or become restricted. The modifications to the immediate family member
provisions are intended to ensure that: (i) those persons with a
substantial nexus to a restricted person will be similarly restricted
under the Interpretation; (ii) NASD members may determine more easily
whether such persons are restricted; and (iii) the Interpretation no
longer will apply to persons not intended to be restricted.
The modifications:
(a) retain the investment history exemption, and expand it to
include the use of investment history at firms other than the member
making the allocation. The burden of obtaining such information will
remain with the firm making the sale;
(b) eliminate the immediate family restrictions on conditionally
restricted persons and clarify that the Interpretation will apply only
to conditionally restricted persons and to persons who are supported
directly or indirectly to a material extent by that conditionally
restricted person; and
(c) with respect to absolutely restricted persons, continue to
apply the immediate family restrictions to persons supported by the
restricted individual and to allocations by the restricted individual's
firm, but no longer will prohibit sales to non-support family members
of an absolutely restricted person by a broker-dealer that does not
employ the absolutely restricted person, where the absolutely
restricted person has no ability to control the allocation of the hot
issue.
There will continue to be a violation if it can be determined that
the restricted person has a beneficial interest in the account to which
an allocation was made.
C. Venture Capital Investors
The Committee determined that the Interpretation should permit bona
fide venture capital investors to purchase a hot issue to maintain
their percentage ownership in an entity, notwithstanding that the
venture capital investor may be a restricted person, or that such
person may have a beneficial interest in the venture capital account.
Venture capital investors often play a pivotal role in the continued
viability of an entity prior to its public offering. Therefore, such
investors should be allowed to maintain their ownership interest after
the entity completes its public offering.
The venture capital investor, in order to purchase the hot issue
without implicating the Interpretation's restrictions, must meet the
following conditions:
(a) One year of preexisting ownership in the entity;
(b) No increase in the investor's percentage ownership above that
held for the three months prior to the filing of a registration
statement in connection with the initial public offering;
(c) A lack of special terms in connection with the purchase; and
(d) The venture capital investor cannot assign, sell, pledge,
hypothecate or otherwise dispose of the securities for a period of
three months following the effective date of the registration statement
in connection with the offering.
The conditions imposed on the venture capital investor are intended
to ensure that the securities can be purchased by a bona fide venture
capital investor who has had an on-going interest in an entity, and
protect against any attempt to circumvent the Interpretation's
restrictions by investing in an entity shortly before its public
offering.
D. Investment Partnerships and Corporations
The Interpretation generally disallows sales of a hot issue to an
investment partnership or corporation, or similar account (``investment
partnership'') if a restricted person has a beneficial interest in the
entity. Thus, an investment partnership with several limited partners
would be ``tainted'' due to the limited partnership interest of the
restricted person. In August 1992 and October 1993 Notices to Members,
the NASD announced it would allow investment partnerships, on an
interim basis, to use a ``carve out'' mechanism to prevent restricted
persons with an interest in an investment partnership from
participating in hot issue allocations. This ``carve out'' mechanism
requires the NASD member making such allocation to set up a separate
account for these transactions and obtain from the investment
partnership and its accountants documentation that indicates that the
restricted persons are prevented from participating in a hot issue
allocation.
The carve-out methodology has been codified in the Interpretation.
The NASD intends that the carve-out procedure not allow a person
restricted under the Interpretation to receive a hot issue allocation
inconsistent with the Interpretation's provisions without inequitably
penalizing those not restricted under the Interpretation due to their
interest in an investment partnership in which a restricted person also
has an interest.\6\ The carve-out procedure will allow the limited
partnership to purchase the hot issue by properly allocating the hot
issue away from the restricted limited partner rather than restricting
the whole limited partnership.
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\6\A typical scenario is where a limited partnership with a
large number of limited partners is restricted under the
Interpretation because one of the limited partners is an officer of
an insurance company, and therefore restricted under Paragraph 4 of
the Interpretation.
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In addition, the NASD is amending the Interpretation to provide
that a beneficial interest, as defined under the Interpretation, will
not be created by the receipt of a management fee based on the
performance of an account. The Commission understands that investment
partnerships and other similar accounts typically require that the
management fee structure of such accounts include a performance-based
component. Thus, an investment advisor restricted under Paragraph 4 of
the Interpretation could restrict an entire investment partnership, in
which no restricted persons have an interest, based solely on the
investment advisor receiving a fee based on the performance of the
securities in the investment partnership account. The Beneficial
Interest provision of the Interpretation is intended to address those
accounts in which a restricted person has a substantive, albeit not
necessarily direct, ownership interest that should be appropriately
restricted. The receipt of a performance-based fee, without the
existence of any other beneficial interest, should not create such an
interest.
E. Definition of Public Offering
The Interpretation currently defines ``public offering'' to include
virtually any and all distributions of securities, whether registered
or unregistered under the Securities Act. The definition has imposed
the Interpretation's restrictions on bona fide private placements of
securities which do not present the potential abuses against which the
Interpretation is intended to guard. The amendment will not apply the
Interpretation to a traditional private placement of securities because
such distributions generally are limited in scope and have holding
periods placed on the privately placed securities, thereby limiting the
potential for restricted persons to purchase the securities and resell
or ``flip'' them in a short period of time.
F. Associated Person Definition
Article I, Section (m) of the NASD By-Laws defines a ``person
associated with a member'' to include a partner of a broker-dealer and
any person who is directly or indirectly controlling or controlled by
such member, whether or not such person is registered with the
Association. A certain degree of confusion exists as to the status of
passive investors in broker-dealers, such a broker-dealer limited
partners, equity owners, or subordinated lenders.
Certain passive investors lack the necessary element of control.
Therefore, the Interpretation has been amended to provide that a person
who owns or has contributed 10% or less to a broker-dealer's capital
should not be construed to be an associated person if: (i) such
ownership interest is a passive investment; (ii) the person does not
receive hot issues from the member in which she has the interest; and
(iii) the broker-dealer is not in a position to direct hot issues to
the person. These conditions are intended to prevent such persons from
attempting to use their ownership interests in a broker-dealer to
effect the purchase of hot issues, and circumvent the Interpretation's
objective of a bona fide distribution of a hot issue.
G. Persons Associated With Limited Business Broker-Dealers
Certain broker-dealers transact a securities business that is
limited to direct participation programs or investment company/variable
product securities. Persons associated with such limited broker-dealers
are not in a position to sell, distribute, or withhold hot issue
securities. The Interpretation has been amended to recognize that such
persons would not be in a position to inhibit a bona fide distribution
of a hot issue security. Specifically, the Interpretation has been
modified so that persons associated with broker-dealers whose business
is limited to direct participation programs or investment company/
variable product securities are not restricted under the Interpretation
to the same extent as those persons associated with broker-dealers with
a more comprehensive securities business. The modification applies only
to a person associated with such a limited broker-dealer, and not to
the broker-dealer itself, as it is inappropriate for any NASD member to
purchase a hot issue security for its own account, regardless of the
extent of its securities business.
H. Issuer Directed Securities
Presently, an employee of an issuer, who also is restricted under
the Interpretation, must receive permission from the NASD Board of
Governors in order to purchase hot issue securities of its employer, if
the employee does not have the requisite investment history with the
NASD member making the securities distribution. For example, an
employee of a manufacturing company who is married to the senior
officer of a bank would be restricted under the Interpretation because
he or she is the immediate family member of a restricted person under
Paragraph 3 of the Interpretation. Under the proposed changes to
Paragraph 3 of the Interpretation, the employee would still be
restricted if the senior officer of the bank directly or indirectly
supports the employee. If permission is granted by the Board of
Governors, the employee is allowed to purchase the securities of the
employer without meeting the investment history requirement, but the
amount purchased would still have to meet the insubstantial and not
disproportionate tests described above.
Issuer-directed share programs are viewed as a valuable tool in
employee development and retention, and are not likely to pose the risk
of members using these securities to reward other persons who are in a
position to direct future business to the member. Thus, the
modifications to the Issuer Directed Securities section of the
Interpretation will allow employees of issuers to purchase hot issue
securities of the employer under the same terms and conditions as
persons associated with NASD members are permitted in connection with
purchases of securities issued by the member, pursuant to an exemption
provided in Section 13 of Schedule E to the NASD's By-Laws.
I. Cancellation Safe Harbor
It will not be a violation if a NASD member makes an allocation of
a hot issue to a restricted person or account, so long as the member
cancelled the trade and reallocated the security at the public offering
price to an unrestricted account, prior to T+1 of the initial
transaction. The clarification is intended to remedy concerns caused by
inadvertent violations of the Interpretation that are corrected by the
NASD member making the distribution. Sales following cancellation would
need to be made in compliance with applicable laws, including section 5
of the Securities Act.
Whether a particular cancellation and reallocation for purposes of
compliance with the Interpretation will raise an issue under Rule 10b-6
will depend upon the facts and circumstances involved in that
cancellation and reallocation. For purposes of Rule 10b-6, a
distribution includes ``the entire process by which in the course of a
public offering the block of securities is dispensed and ultimately
comes to rest in the hands of the investing public.''\7\ Thus, a
distribution continues if a broker-dealer withholds any part of an
offering in proprietary or nominee accounts and later sells those
securities to the public after secondary trading has begun.\8\ However,
a cancellation of a bona fide purchase order will not reopen the
distribution where there is no reason for the underwriter to believe
that the purchase order would be cancelled.\9\
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\7\R.A. Holman & Co. v. SEC, 366 F.2d 446, 449 (2d Cir. 1966),
modified on other grounds, 377 F.2d 665 (2d Cir. 1966), cert.
denied, 389 U.S. 991 (1967).
\8\Wall Street West, Inc, 47 S.E.C. 1003, 1005 (1984).
\9\Cf. Id.
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III. Comments
A. Investment Partnerships
Weil, Sullivan and CSFB believe that the carve-out methodology
proposed by the NASD remains unduly restrictive. Weil argues that the
proposal is unduly restrictive with respect to those investment
partnerships in which conditionally restricted persons hold beneficial
interests. Weil notes that members may sell directly to conditionally
restricted persons if such sales are made in conformity with the
investment history exemption. Weil suggests that members be permitted
to sell hot issues to investment partnerships in which conditionally
restricted persons hold beneficial interests if the sales conform to
the normal investment practice of the investment partnership and such
sales meet the ``insubstantial'' and ``not disproportionate'' tests.
The NASD notes that it interprets the Interpretation to permit
sales to investment partnerships or corporations in which conditionally
restricted persons with the requisite investment history have a
beneficial interest if the member can demonstrate that the percentage
ownership of the hot issue security attributable to the conditionally
restricted person is not greater than the amount that that person would
have been allowed to purchase directly.\10\ The Commission believes
that this interpretation ensures that conditionally restricted persons
are not treated less favorably if they hold an indirect interest in a
hot issue purchased by an investment partnership than they are if they
directly purchase a hot issue.
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\10\See Letter from T. Grant Callery, Vice President and General
Counsel, NASD, to Mark P. Barracca, Branch Chief, Over-the-Counter
Regulation, SEC, dated November 10, 1994.
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Weil also suggests that the Interpretation permit an investment
partnership that has created a ``hot issue'' to ``journal'' securities
in the hot issue account to the regular account upon completion of the
offering. Weil states that such a transfer of accounts, after the
completion of the distribution of the issue, would have no bearing upon
the adequacy of the distribution to the public. Sullivan suggests that
the NASD dispense with the ``hot issue'' account entirely, instead
permitting investment funds to segregate new issue purchases on their
internal records.
The NASD believes that such a mechanism would make it unnecessarily
difficult to enforce compliance with the carve-out provisions. The
Commission notes that the carve-out mechanism is not necessary when no
conditionally restricted person would obtain an interest in a hot issue
that is greater than the amount that that person would have been
allowed to purchase directly. Therefore, the Commission agrees that a
journaling mechanism is not necessary.
Sullivan also argues that the NASD should permit restricted persons
who manage investment partnerships to maintain a de minimis equity
investment in the managed entities. It argues that federal tax laws
require a general partner to keep a specified minimum interest in the
partnership in order to ensure that it qualifies for taxation as a
partnership under the Internal Revenue Code. It also argues that the
NASD proposes to permit managers to accept performance fees, which
often will greatly exceed any amounts that a manager may earn from its
de minimis investment.
The NASD responds that the Committee that reviewed the
Interpretation explored various de minimis provisions and determined
that: (i) any de minimis amount necessarily would be an arbitrary
figure; and (ii) monitoring accounts to ensure compliance with a de
minimis provision would be difficult.
The Commission acknowledges that on many occasions, performance
fees will greatly exceed any amounts that a manager may earn from its
de minimis investment. However, the Commission agrees with the NASD
that de minimis provisions are arbitrary and that monitoring accounts
to ensure compliance would be difficult.\11\
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\11\The Commission notes that a partnership is not the only
structure that permits flow-through tax treatment.
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Sullivan and CSFB argue that the NASD should permit absolutely
restricted persons to hold a de minimis indirect financial interest in
an investment partnership without triggering the ``carve out''
requirement. Sullivan and CSFB argue that it is possible for an
absolutely restricted person to have an indirect beneficial interest in
an investment partnership because the person is an officer of a member
affiliated with the general partner of the partnership and may benefit
from the partnership's performance solely by virtue of his status as a
shareholder of an entity which owns the member and which receives a
portion of the profits allocated to the general partner.
The NASD objects to this de minimis proposal for the same reasons
that it objected to the other de minimis proposals, namely: (i) any de
minimis amount necessarily would be an arbitrary figure; and (ii)
monitoring accounts to ensure compliance with a de minimis provision
would be difficult.
The Commission notes that the NASD has justified the payment of
performance-based fees because such fees are not deemed to be the
substantive, albeit not necessarily direct ownership, interest that the
Interpretation is intended to restrict. The examples used by Sullivan
and CSFB also present interests which are not substantive. However, not
all such situations may be as innocuous as those posed by Sullivan and
CSFB. The Commission agrees with the NASD that de minimis guidelines
are arbitrary and that monitoring accounts to ensure compliance would
be difficult.
B. Application of Interpretation to Offerings of Straight Debt
Securities
PaineWebber and Sullivan argue that the Interpretation should not
apply to investment-grade straight-debt securities, because the manner
in which they trade would make it impossible for a restricted person to
earn a free-riding premium at the expense of public investors.
PaineWebber states that investment-grade debt is priced relative to the
interest rate of U.S. Treasury securities of comparable maturity. Both
state that such securities are considered fungible with other non-
convertible securities with comparable economic terms and credit
ratings. Alternatively, PaineWebber suggests that the Interpretation
apply to such securities only in those instances in which there has
been a material narrowing in yield spread versus the comparable
maturity U.S. Treasury security between the initial offering yield
spread and the yield spread when the issue is freed to trade in the
secondary market.
The NASD states that PaineWebber and Sullivan have raised
legitimate concerns regarding the treatment of investment-grade
straight-debt securities and that the NBCC should revisit the issue.
However, it believes that these issues can be addressed in another
proposed rule change. The Commission agrees that consideration of these
comments should not delay implementation of the beneficial
modifications contained in this proposed rule change.
C. Application of Interpretation to Offerings of Equity Securities for
Which a Secondary Trading Market Exists
Sullivan suggests that the Interpretation should not apply to most
common stock offerings by issuers whose common stock is currently
listed on a national securities exchange or traded over-the-counter,
because the stock already is traded publicly and the public offering
price will reflect the stock's market price. It suggests that the
Interpretation should apply only in those instances when the public
offering price reflects a discount greater than a specified percentage
from the closing price on the pricing date or when the stock has become
hot for a reason other than increased demand for the issuer's stock
generally.
The NASD states that Sullivan has raised legitimate concerns
regarding the treatment of equity securities for which a secondary
trading market exists and that the NBCC should revisit the issue.
However, it believes that these issues can be addressed in another
proposed rule change. The Commission agrees that consideration of these
comments also should not delay implementation of the beneficial
modifications contained in this proposed rule change.
D. Definition of Public Offering
Sullivan also suggests that the definition of ``public offering''
for purposes of the Interpretation expressly exclude offerings made in
reliance on Rule 144A and should exclude ``exchange offers'' and
``offerings made pursuant to a merger or acquisition.''
The NASD states that it interprets the Interpretation not to apply
to offerings made in reliance on Rule 144A. In addition, it states that
it does not apply the Interpretation to ``exchange offers'' and
``offerings made pursuant to a merger or acquisition'' but to other
distributions made in connection with these types of offerings.
IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to the NASD and, in particular, the requirements
of Section 15A(b)(6) of the Act.12 Section 15A(b)(6) requires,
inter alia, that the NASD's rules be designed to prevent fraudulent and
manipulative acts, promote just and equitable principles of trade, and
protect investors and the public interest. The Commission believes that
the amendments to the Interpretation further the goals of Section
15A(b)(6) because the amendments ensure that the Interpretation will
continue to prohibit those transactions which present an undue risk
that a member will withhold ``hot issue'' securities for its own
benefit or use the securities to reward other persons who are in a
position to direct future business to the member. At the same time, the
Commission believes that the amendments will permit certain
transactions that the Interpretation previously prohibited, but which
do not pose a risk of undercutting the Interpretation's objective of a
bona fide distribution of hot issue securities to the public. The
Commission finds that the proposed rule change will facilitate the
capital raising process by removing restrictions and compliance burdens
imposed by the Interpretation with respect to certain transactions
where application of the Interpretation does not enhance investor
protection or the public interest, e.g., stand-by purchasers, venture
capital investors and issuer-directed transactions). The Commission
also finds that the changes in the definition of immediate family and
associated person ensure that the Interpretation continues to apply to
those allocations which are likely to benefit the member or are likely
to be used as a quid pro quo for persons in a position to direct future
business to the member, while permitting allocations to categories of
persons who are not likely to direct future business to the member.
Finally, the Commission recognizes that the Interpretation will
continue to prohibit or restrict certain transactions which are not
likely to conflict with the objective of the transaction. However, the
Commission believes that permitting those transactions would pose an
undue risk that the NASD will be unable to effectively monitor
compliance with the Interpretation. Therefore, the Commission believes
that the Interpretation should continue to apply on a prophylactic
basis to these categories of transactions.
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\1\215 U.S.C. 78o-3.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that File No. SR-NASD-94-15 be, and hereby is, approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30709 Filed 12-13-94; 8:45 am]
BILLING CODE 8010-01-M
