[Federal Register Volume 60, Number 138 (Wednesday, July 19, 1995)]
[Notices]
[Pages 37117-37122]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17731]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35961; File No. SR-NASD-95-29]
Self-Regulatory Organizations; Filing of Proposed Rule Change by
National Association of Securities Dealers, Inc. to the Corporate
Financing Rule at Article III, Section 44 of the Rules of Fair Practice
Regarding Rights of First Refusal
July 12, 1995.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 1, 1995, the National
Association of Securities Dealers, Inc. (``NASD'' or ``Association'')
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 the NASD. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
\1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing to amend Article III, section 44 of the Rules
of Fair Practice regarding rights of first refusal. Proposed new
language is in italics; proposed deletions are bracketed.
Rules of Fair Practice, Article III, The Corporate Financing Rule,
Underwriting Terms and Arrangements
Section 44
* * * * *
(c) Underwriting Compensation and Arrangements
* * * * *
(3) Items of Compensation
(A) For purposes of determining the amount of underwriting
compensation received or to be received by the underwriter and
related persons pursuant to paragraph (c)(2) above, the following
items and all other items of value received or to be received by the
underwriter and related persons in connection with or related to the
distribution of the offering, as determined pursuant to paragraph
(c)(4) below shall be included:
* * * * *
(ix) any right of first refusal provided to the underwriter and
related persons to underwrite or participate in future public
offerings, private placements or other financings [by the issuer],
which will have a compensation value of 1% of the offering proceeds
or that dollar amount contractually agreed to by the issuer and
underwriter to waive or terminate the right of first refusal;
* * * * *
(6) Unreasonable Terms and Arrangements
* * * * *
(B) Without limiting the foregoing, the following terms and
arrangements, when proposed in connection with the distribution of a
public offering of securities, shall be unfair and unreasonable:
* * * * *
(v) any right of first refusal provided to the underwriter and
related persons [regarding] to underwrite or participate in future
public offerings, private placements or other financings which:
(1) has a duration of more than [five (5)] three (3) years from
the effective date of the offering; or
(2) has more than one opportunity to waive or terminate the
right of first refusal in consideration of any payment or fee;
(vi) any payment or fee to waive or terminate a right of first
refusal regarding future public offerings, private placements or
other financings provided to the underwriter and related persons
which:
(1) has a value in excess of the greater of one percent (1%) of
the offering proceeds in the public offering where the right of
first refusal was granted (or an amount in excess of one percent if
additional compensation is available under the compensation
guideline of the original offering) or five percent (5%) of the
underwriting discount or commission paid in connection with the
future financing (including any overallotment option that may be
exercised), regardless of whether the payment or fee is negotiated
at the time of or subsequent to the original public offering; or
(2) is not paid in cash.
Subsection (vi)-(xii) are renumbered (vii)-(xiii).
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
Background
The NASD developed its policy on the valuation of rights of first
refusal in the early 1970s. Rights of first refusal are typically
negotiated in connection with an issuer's initial public offering and
grant the underwriter a right to underwrite or participate in any
future public offerings, private placements, or other financings by the
issuer for a certain period of years. The NASD values rights of first
refusal as a non-cash item of compensation at one
[[Page 37118]]
percent of the offering proceeds and currently limits the duration of
the right to 5 years.\2\ To the extent that an underwriting agreement
includes a provision specifying a dollar amount for the waiver or
termination of a right of first refusal, it has been the policy of the
NASD Corporate Financing Department (``Department'') under the
Corporate Financing Rule to value the right of first refusal on the
basis of the specified dollar amount in place of the one percent
valuation.
\2\ See, Corporate Financing Rule at Article III, Section 44 of
the Rules of Fair Practice (Corporate Financing Rule), section
(c)(3)(A)(ix) and section (c)(6)(B)(v). NASD Manual, paragraph 2200D
at pages 2206 and 2209.
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The NASD believes that members should be permitted to negotiate to
waive or terminate a right of first refusal in the event that the
issuer wishes to use a different underwriter to subsequently raise
additional capital through a public or private offering of its
securities, provided that amounts negotiated are limited to an amount
that has some relation to the size of the subsequent offering in which
the member is not participating. Because use of right of first refusal
are primarily confined to certain underwriters of companies that are
generally small and without significant operating history, the NASD has
found that issuers negotiating with an underwriter for the first time
in connection with an initial public offering often may not fully
comprehend that they have agreed to extend their relationship with the
underwriter for as many as five years, nor be in a position to
influence the terms of the right. In addition, the NASD has observed
that certain underwriters routinely negotiate to receive rights of
first refusal at the time of an initial public offering and later
negotiate to waive or terminate their rights, apparently without any
original intent to actually underwrite any subsequent offering of
securities by the issuer.
The NASD is concerned that underwriters not be permitted to avoid
underwriting compensation limits by negotiating to waive or terminate a
right of first refusal with no limitation whatsoever on the amount of
compensation they might negotiate to receive. The NASD is also
concerned that an issuer may find it difficult to negotiate appropriate
underwriting compensation with a new underwriter, where the issuer has
determined to sever its relationship with its former underwriter and
the former underwriter requires a substantial payment to waive or
terminate its right of first refusal. Finally, the NASD believes that
the policy on rights of first refusal should also protect investors,
who ultimately incur the cost when an issuer compensates an underwriter
for waiving or terminating a right of first refusal.
Description of Proposed Rule Change
Three-Year Duration
Currently, the NASD Corporate Financing Rule at section
44(c)(6)(B)(v) to Article III of the Rules of Fair Practice prohibits,
as unreasonable, any ``right of first refusal'' regarding future public
offerings, private placements or other financings that has a duration
of more than five (5) years from the effective date of the offering.
The NASD is concerned that smaller issuers entering into these
agreements may not be in a position to fully evaluate the ramifications
of agreeing to a right of first refusal with a term of five years. In
addition since the NASD staff rarely, if ever, sees a right of first
refusal with a term less than five years, the duration of rights may
not be freely negotiated by the issuer and the underwriter. The NASD
has determined that a right of first refusal with a duration of five
years is overreaching and that a three-year period is more appropriate.
The NASD is proposing to modify section 44(c)(6)(B)(v) to Article III
of the Rules of Fair Practice to reduce the duration of the right of
first refusal from five years to three years. That portion of
subparagraph (v) referring to the proposed three-year limitation is
proposed to be separated and numbered as new subparagraph (v)(1).
Number of Payments for Waiver/Termination
The NASD finds that certain underwriters routinely negotiate to
receive rights of first refusal at the time of an initial public
offering and later negotiate, repeatedly, to waive or terminate their
rights, apparently without any original intent to actually underwrite
any subsequent offerings of securities by the issuer. The NASD is
concerned over underwriters receiving a ``stand-aside'' payment for
each subsequent offering by an issuer that has established a
relationship with a new underwriter, where the original underwriter is
no longer providing any bona fide services to the issuer.
The NASD also is concerned that multiple stand-aside payments by
the issuer to a member result in difficulty for both the member and the
NASD in tracking the payments received over the term of the right. Such
tracking is important in order to insure compliance with the Corporate
Financing Rule's compensation guidelines for the original offering.\3\
\3\ The NASD anticipates that the former underwriter will
contact the NASD Corporate Financing Department when it is
negotiating a waiver or termination of a right of first refusal to
obtain information on whether additional compensation is available
under the compensation guideline applicable to the original
offering.
The NASD, therefore, proposes to add a new subparagraph (v)(2) to
section 44(c)(6)(B) to Article III of the Rules of Fair Practice to
limit a member to one opportunity to waive or terminate a right of
first refusal in consideration of any payment or fee. The NASD notes
that an underwriter not wishing to terminate its right of first refusal
for future offerings may preserve its right by waiving its
participation in a particular offering without accepting payment for
such waiver.
Limitation on Waiver/Termination Compensation
The NASD believes that members should be permitted to negotiate to
waive or terminate a right of first refusal in the event that the
issuer wishes to use a different underwriter to subsequently raise
additional capital through a public or private offering of its
securities. However, the NASD believes that the amounts negotiated for
the waiver or termination of the right should be limited to an amount
that has some relation either to the original offering or to the
subsequent offering in which the member is not participating.
The NASD is concerned that the cost to the issuer of raising
additional capital may become excessive where the issuer's former
underwriter requires an excessive payment to waive or terminate its
right of first refusal. The NASD, therefore, proposes to limit the
amount of such waiver/termination payments by adding a new subparagraph
(vi) to section 44(c)(6)(B) to Article III of the Rules of Fair
Practice. New subparagraph (vi)(1) would prohibit any payment to waive
or terminate a right of first refusal that has a value in excess of the
greater of 1% of the original offering (or a higher amount if
additional compensation is available under the compensation guideline
applicable to the original offering) or 5% of the underwriting discount
or commission paid in connection with the future offering (including
any overallotment option that may be exercised), regardless of whether
the payment or fee is negotiated at the time of or subsequent to the
original public offering.
The proposed provision is intended to balance the interests of
former underwriters and issuers by prescribing
[[Page 37119]]
a formula for waiver/termination payments that allows former
underwriters to participate in the success of issuers, while at the
same time not jeopardizing that success with a payment so large that it
harms an issuer's ability to conduct and realize the benefits of a
secondary offering.\4\ The proposed one percent limitation reflects the
NASD's belief that it is appropriate that the former underwriter be
permitted to negotiate a fee that is at least equal to the valuation of
the right of first refusal in connection with the NASD's review of the
original offering in the event that the issuer wishes to sever its
relationship with the former underwriter.\5\ The five percent
alternative limitation reflects the NASD's belief that the former
underwriter that assumed the risk of distributing the issuer's IPO
should be allowed to participate or equitably benefit in the issuer's
subsequent offering of securities, including any overallotment option
that may be exercised, regardless of whether the payment or fee is
negotiated at the time of or subsequent to the original public
offering.
\4\ The NASD does not include the payment to waive or terminate
a right of first refusal as compensation in connection with its
review of the subsequent offering of securities. The proposed rule
change does not modify this practice.
\5\ For example, where the offering proceeds of the original
offering were $10 million and the new offering is to be $150
million, with a discount of 6 percent or $9 million, the member
could negotiate a fee for waiver or termination of the right of
first refusal of up to $450,000 (5 percent of $9 million), which is
greater than 1 percent of $10 million, or $100,000.
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Cash Payment Requirement
The NASD also proposes adding provision (2) to the new subparagraph
(vi) of section 44(c)(6)(B) to Article III of the Rules of Fair
Practice to specify that compensation to members for waiving or
terminating a right of first refusal must be in the form of cash. The
NASD believes this provision will limit the waiver/termination payment
to a percentage of the capital raised in the secondary offering and
protect the company's shareholders from dilution resulting from the
issuance of shares to a former underwriter.
Additional Clarifications
The proposed rule change would revise subparagraph (ix) to section
44(3)(A) and subparagraph (v) to section 44(6)(B) to Article III of the
Rules of Fair Practice to make the rule language consistent. The rule
change to subparagraph (ix) to section 44(c)(A) would clarify policy
that any right of first refusal provided to the underwriter and related
persons to underwrite or participate is applicable to all future
``public'' offerings and ``private placements or other financings.''
The proposed rule change would also revise subparagraph (v) to
section 44(6)(B) to Article III of the Rules of Fair Practice to
clarify current policy that all unreasonable terms and arrangements
cited under subparagraph (v) to section 44(6)(B) shall apply to any
right of first refusal ``provided to the underwriter and related
persons to underwrite and participate in'' future public offerings,
private placements or other financings.
Implementation of Rule
The NASD is proposing to make the proposed rule change applicable
to filings made with the Corporate Financing Department of the NASD
that are not yet effective with the SEC on the date of implementation
of the rule change announced by the NASD in a Notice to Members
following SEC approval. The implementation date announced by the NASD
will not be more than 90 days following SEC approval of the rule
change. Thus, offerings filed with the Corporate Financing Department
that have not become effective with the SEC on the date of
implementation announced by the NASD will be required to comply with
the proposed rule change, regardless of whether the Corporate Financing
Department has previously issued an opinion that it has no objections
to the terms and arrangements. It is the intention of the Corporate
Financing Department after the proposed rule change has been published
for comment to include a notification with all correspondence with
counsel to members regarding this proposed amendment to the Corporate
Financing Rule.
The NASD believes that the proposed rule change is consistent with
the provisions of section 15A(b)(6) of the Act which provides that the
proposed rule change be designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest in that the proposed rule change will
preserve ``rights of first refusal'' as a valuable item of compensation
to an underwriter, while protecting issuers and investors from
excessive payments to waive or terminate a right of first refusal
granted to a former underwriter.
(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, as amended.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in Notice to
Members 94-82 (Oct. 1994). Four comments were received in response
thereto and were generally opposed to the proposed rule.\6\
\6\ Comment letters were submitted by Lew Lieberbaum and Co.,
Inc.; Spelman & Co., Inc.; Kelley Drye and Warren; and Bachner,
Tally, Polevoy and Misher.
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The major issues raised by the commenters can be generally
categorized as follows: (1) The duration of a right of first refusal,
(2) the number of payments permitted for waiver or termination of a
right, (3) limits on waiver/termination compensation, (4) the cash
payment requirement, and (5) the valuation of rights of first
refusal.\7\
\7\ Notice to Member 94-82 incorrectly stated that the NASD is
proposing to amend the methodology employed by the NASD for valuing
a right of first refusal, which as currently valued for compensation
purposes is 1% of the gross proceeds of the offering, or the amount
specified in the underwriting contract to waive or terminate the
right. The incorrect rule language would have limited the
compensation value of a right of first refusal to the ``lesser of''
1% of the gross offering proceeds on the contracted amount. The NASD
is not considering such a proposed rule change and the comments
opposing this proposal, therefore, are not discussed in this filing.
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Duration of the Right of First Refusal
The proposed rule change would limit the term of a right of first
refusal to a maximum of three years.\8\ Two commenters argued that
early stage companies operate unprofitably for more than three years
after an IPO and, as a result, limiting a right of first refusal to
three years could prevent the underwriter from realizing the benefits
of underwriting an offering for a financially stable issuer. Two
commenters also argued that securities offerings of smaller issuers are
inherently riskier for the underwriter than securities offerings of
more financially-stable companies. Typically, small early-stage
companies are not well known to the public market and, because of the
size and limited
[[Page 37120]]
resources of the underwriter or restrictions as a result of state blue
sky laws, the offering is limited with regard to possible purchasers of
the securities. These commenters believe, therefore, that the
underwriter should be compensated commensurate with the greater risk of
the IPO. One commenter suggested that there is no downside to the
issuer to a five-year right of first refusal. The issuer is not
obligated to use the services of the original underwriter, but rather
is merely prevented from undertaking an offering with another
underwriter without compensating the original underwriter. Furthermore,
one commenter argued that the issuer and underwriter are free to
negotiate a right of first refusal of lesser duration, and to limit
expressly duration to three years would hinder the ability of an early
stage company to gain access to the public capital markets by reducing
the incentive to underwrite such a company's securities.
\8\ Two commenters expressed concern with the proposed reduction
in the maximum permissible duration of a right of first refusal from
five years to three years and one commenter generally agreed that
the 3-year limit was reasonable, and one commenter expressed no
view.
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In response to the above comments, the NASD remains concerned that
smaller issuers entering into these agreements may not be in a position
to evaluate fully the ramifications of agreeing to a right of first
refusal with terms of five years. The NASD also has concluded that such
issuers are often not in a position to influence such terms. In support
of this belief, the NASD finds that it rarely if ever sees a right of
first refusal with a term of less than five years. The five-year
maximum term is routinely included in letters of intent and
underwriting agreements and appears to be presented to issuers as a
usual and customary underwritten arrangement that is non-negotiable.
One commenter suggested that offerings that meet the definition of
``small business issuer'' under Regulation S-B of the Securities Act of
1933 (the ``Securities Act'') and offerings conducted under Regulation
A of the Securities Act be permitted to retain a five year right of
first refusal while rights in offerings of all other issuers would be
limited to three years. The commenter argues that the NASD has
historically acknowledged the inherent risk of underwriting small
issuers by permitting a greater percentage of underwriting compensation
for smaller offerings, and proposes that a comparable analysis be
applied to the duration of a right of first refusal.
In response, the NASD believes the commenter's suggestion would
exempt from the proposed rule change those smaller issuers who are most
unable to evaluate the ramifications of the rights of first refusal and
who have the least ability to influence the right's terms. Upon review,
the NASD also does not believe the 3-year limitation will reduce the
ability of smaller issuers to obtain financing from members.
One commenter agreed that the three-year limitation appeared
reasonable but that there should be room for exceptions. For example,
the commenter suggests that if an issuer does exceptionally well during
this period and issues securities of an affiliated company in a spinoff
transaction, the underwriter's three-year time period should begin anew
as vis-a-vis the spinoff. The NASD notes that exceptions to the
Corporate Financing Rule may be granted by a Hearing Subcommittee of
the Corporate Financing Committee in connection with a member's request
for review of a staff determination that proposed offering terms and
arrangements are unfair and unreasonable. With regard to the
commenter's example, the NASD does not believe the contractual
obligation of a company to its original underwriter under a right of
first refusal should automatically become the obligation of that
company's affiliate when it goes public through a spin-off transaction.
Number of Payments for Waiver/Termination
The proposed rule change would permit only one payment to a member
for waiving a right of first refusal in connection with a subsequent
financing. Upon such payment, the right would be deemed to be
terminated.\9\
\9\ Three of the four commenters were opposed to limiting the
receipt of compensation for waiving or terminating a right of first
refusal to one time.
Commenters argued that such a limitation unfairly penalizes the
underwriter and that one payment should not affect subsequent offerings
during the term of the right. Despite such arguments, the NASD's
concerns remain regarding underwriters receiving a ``stand-aside''
payment for each subsequent offering by an issuer that has established
a relationship with a new underwriter when the original underwriter is
no longer providing any bona fide services to the issuer. In addition,
the NASD believes that multiple payments result in greater difficulty
for both the member and the NASD in terms of tracking the amounts
received over the term of the right in order to insure compliance with
the compensation guideline of the original offering. The NASD also
notes that an underwriter not wishing to terminate its right of first
refusal for future offerings may preserve its right by waiving its
participation in a particular offering without accepting payment for
such waiver.
One commenter argued that the NASD is unnecessarily interfering
with the contractual relationship between the issuer and the
underwriter, who are free to negotiate a termination of the right if
they so desire. In response, the NASD notes that the Corporate
Financing Rule is intended to regulate certain contractual provisions
between underwriters and issuers to protect the investors in these
issues. The NASD believes this provision of the proposed rule change
will protect the investors of smaller issuers who are less likely to be
able to influence or negotiate the termination of the right of first
refusal.
One commenter argued that this provision of the proposed rule
change would force members to relinquish their right for very small
payment because the secondary offering is not likely to be as large as
the example cited in Notice to Members 94-82 and in footnote 3 of this
filing (where the original offering was $10 million and the new
offering is $150 million). The commenter argues that an underwriter may
be willing to accept substantially less to waive its right in order to
allow an issuer other financing options if the right of first refusal
were to remain intact with respect to future financings. In response,
the NASD notes that under the proposed rule change, underwriters may
waive their right to an unlimited number of times if they do not
receive a payment. Therefore, an underwriter not wishing to terminate
its right of first refusal for future offerings may preserve the right
by waiving its participation in an offering and by not accepting
payment for the waiver.
Limits on Waiver/Termination Compensation
The proposed rule change would limit the amount of any payment or
fee to waive or terminate a right of first refusal to the greater of 1
percent (1%) of the original offering proceeds or 5 percent (5%) of the
commission paid with respect to the subsequent offering. One commenter
argued that there should be no limitation on the amount of the
permitted fee for waiving or terminating a right and that any fee
should be determined by arms-length negotiation between the issuer and
the underwriter, who are uniquely capable of judging the value of the
right. The commenter states that in many cases the right of first
refusal has no value to the member because many early-stage issuers do
not achieve a level of growth sufficient to warrant a subsequent
offering of their securities and, therefore, the member has forfeited
1% of the original offering
[[Page 37121]]
to obtain a right for which it derives no related benefit.
As discussed above, the NASD remains concerned about the initial
capacity of smaller issuers to understand the ramifications of the
right of first refusal in an IPO and its ability to influence the terms
of the right. Moreover, to protect the investors in the issuer, the
NASD has concluded that its concerns necessitate the restrictions
contained in the proposed rule change.
The commenter also argues that it is the issuer that has the upper
hand in setting the terms of the secondary offering and if the member
does not agree to these terms, the issuer is free to arrange for the
secondary offering to be underwritten by another member. In response,
the NASD considers it unlikely that issuers intentionally set the terms
of their secondary offerings to discourage the initial underwriter. The
NASD believes the normal priority for issuers when setting the terms of
their secondary offerings is optimum capital formation. In particular,
the typical secondary offering of a small business issuer is
considerably larger than the issuer's initial public offering.
The above commenter, while opposing a payment limitation, suggested
in lieu of the proposed limitation that the NASD adopt a range of
permissible cash payments as a percentage of the subsequent offerings
depending on the size and stage of development of the issuer and the
dollar amount of the offering. The commenter considers the 5 percent
limitation arbitrary and suggested that payments up to 20% of the
underwriting compensation of the subsequent offering be permitted to be
received by underwriters of small business issuers or of offerings of
less than $25 million in order to allow a fair compensation to the
member. In response, the NASD believes that a payment equal to 20% of
the underwriting compensation of a subsequent offering would create a
hardship for smaller issuers, and consequently their investors, in
terms of reduced net proceeds and/or the ability to attract a new
underwriter. The NASD's determination to base the percentage at 5% was
not arbitrary but determined after considerable deliberation to balance
the interests of the former underwriter and the issuer and arrive at a
percentage that allowed the former underwriter to participate in the
success of the issuer, while not jeopardizing the success with a
payment so large that it affects the issuer's ability to conduct and
realize the benefits of a secondary offering.
One commenter stated that this is an ideal proposal that serves
both parties. It ensures that the original underwriter is justly
rewarded if the issuer becomes highly successful by preventing the
issuer from severing all ties with the original underwriter without
compensating it in a manner that is consistent with the underwriter's
previously provided services and interests. At the same time, the
proposed provision would permit the issuer to ascertain the actual cost
of terminating or waiving the right at the time of the original and
subsequent offering. The commenter also supported this proposal on the
basis that it is appropriate to base the amount of payment to the
original underwriter on the amount of the new underwriter's
compensation.
Cash Payment Requirement
The proposed rule change specifies that compensation to members for
waiving or terminating a right of first refusal must be in the form of
cash. One commenter argued that the proposal to require only cash
payments in consideration of the waiver or termination of a right would
work to the detriment of both underwriters and issuers since early-
stage companies often lack the liquidity to make substantial cash
payments. The commenter believes that requiring issuers to make
payments in cash could reduce working capital and damage a small
company's ability to meet payment obligations, thus jeopardizing the
company's ability to function as a going concern. In response, the NASD
believes that a company should have sufficient cash available from the
proceeds of the subsequent offering to make any necessary payment to a
former underwriter holding a right of first refusal. The NASD also
believes this provision of the proposed rule change is appropriate to
protect the company's shareholders from the dilution resulting from the
issuance of securities to a former underwriter.\10\
\10\ Any such securities would, moreover, be in addition to
securities that the former underwriter previously acquired in
connection with the original public offering.
Other Comments
Two commenters addressed the NASD's statements that issuers
negotiating with an underwriter often may not be in a position to
influence the terms of the right of first refusal or fully comprehend
that they have agreed to extend their relationship with the underwriter
for five years. One commenter noted, specifically, that issuers are
represented by counsel and that most issuers have knowledgeable,
competent officers who are aware of the terms of their agreement with
the underwriter. This commenter argued that the proposed rule change
imposes undue restrictions on the ability of underwriters and issuers
to negotiate a mutually acceptable arrangement. In spite of such
arguments, the NASD's concerns remain that small issuers, even with
counsel, may not understand the ramifications of the right of first
refusal, nor be able to influence the terms of these agreements. The
NASD has often found that issuer's counsel is generally experienced in
corporate law and inexperienced in securities law matters. The NASD
reiterates the regulatory purposes of the Corporate Financing Rule is
to protect investors in such issuers. One commenter stated that it
appears that the committees of the NASD are representative of major
sized firms putting forth recommendations for rule changes that will
eventually give the major underwriters and wire houses more and more
control of the industry. In response, the NASD notes that the standing
Committees of the NASD Board of Governors consist of members from both
large and small firms. The Corporate Financing Committee was the review
committee for the proposed rule change and, at the time this matter was
considered, was chaired by an individual representing a very small NASD
member.
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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the
[[Page 37122]]
Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to File Number SR-NASD-95-29 and
should be submitted by August 9, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-17731 Filed 7-18-95; 8:45 am]
BILLING CODE 8010-01-M
