[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
