[Federal Register Volume 69, Number 234 (Tuesday, December 7, 2004)]
[Notices]
[Pages 70735-70746]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26809]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50749; File No. SR-NASD-2004-022]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to the Corporate Financing Rule and Shelf Offerings of Securities

November 29, 2004.
    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 February 4, 2004, the National Association of Securities Dealers, 
Inc. (``NASD'') 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. On 
May 4, 2004, NASD filed Amendment No. 1 to its proposed rule change, 
which replaced and superseded the original rule filing in its entirety. 
On July 16, 2004, NASD filed Amendment No. 2 to its proposed rule 
change.\3\ On October 12, 2004, NASD filed Amendment No. 3 to its 
proposed rule change.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 2 made several technical corrections and 
modified the Market Transactions Exception contained in the proposed 
rule change.
    \4\ Amendment No. 3 corrected clerical and typographical errors 
contained in Amendment No. 2.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rules 2710, 2810, IM-2440, and 
Schedule A to the NASD By-Laws to address the filing requirements and 
the regulation of public offerings of securities registered with the 
Commission and offered by members pursuant to SEC Rule 415 of 
Regulation C under the Securities Act of 1933 (``SEC Rule 415'') 
(``shelf offerings''). Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
[brackets].

Schedule A to NASD By-Laws

    Assessments and fees pursuant to the provisions of Article VI of 
the By-Laws of NASD shall be determined on the following basis.
    Sections 1 through 6--No change.

[[Page 70736]]

Section 7--Fees for Filing Documents Pursuant to the Corporate 
Financing Rule

    (a) There shall be a fee imposed for the initial filing of 
[initial] documents and information relating to any offering filed with 
NASD pursuant to the Corporate Financing Rule equal to $500 plus .01% 
of the proposed maximum aggregate offering price or other applicable 
value of all securities registered on an SEC registration statement or 
included on any other type of offering document (where not filed with 
the SEC), but shall not exceed $30,500. The amount of filing fee may be 
rounded to the nearest dollar.
    (b) There shall be an additional fee imposed for the filing of any 
amendment or other change to the documents and information initially 
filed with NASD pursuant to the Corporate Financing Rule equal to .01% 
of the net increase in the maximum aggregate offering price or other 
applicable value of all securities registered on an SEC registration 
statement, or any related Rule 462(b) registration statement, or 
reflected on any Rule 430A prospectus, or included on any other type of 
offering document. However, the aggregate of all filing fees paid in 
connection with an SEC registration statement or other type of offering 
document shall not exceed $30,500.
* * * * *

IM-2440. Mark-Up Policy

    The question of fair mark-ups or spreads is one which has been 
raised from the earliest days of the Association. No definitive answer 
can be given and no interpretation can be all-inclusive for the obvious 
reason that what might be considered fair in one transaction could be 
unfair in another transaction because of different circumstances. In 
1943, the Association's Board adopted what has become known as the ``5% 
Policy'' to be applied to transactions executed for customers. It was 
based upon studies demonstrating that the large majority of customer 
transactions were effected at a mark-up of 5% or less. The Policy has 
been reviewed by the Board of Governors on numerous occasions and each 
time the Board has reaffirmed the philosophy expressed in 1943. 
Pursuant thereto, and in accordance with Article VII, Section 1(a)(ii) 
of the By-Laws, the Board has adopted the following interpretation 
under Rule 2440.
    It shall be deemed a violation of Rule 2110 and Rule 2440 for a 
member to enter into any transaction with a customer in any security at 
any price not reasonably related to the current market price of the 
security or to charge a commission which is not reasonable.
    (a) through (b) No change.
(c) Transactions to Which the Policy is Applicable
    The Policy applies to all securities handled in the over-the-
counter market, whether oil royalties or any other security, in the 
following types of transactions:
    (1) through (5) No change.
    (6) Transactions in which a member sells securities from an 
offering registered with the SEC pursuant to SEC Rule 415 that comply 
with the exemption from filing with NASD under Rule 2710(b)(10)(B) for 
Market Transactions.
(d) Transactions to Which the Policy is Not Applicable
    The Mark-Up Policy is not applicable to the sale of securities 
where a prospectus or offering circular is required to be delivered and 
the securities are sold at the specific public offering price[.], 
including any offering or transaction subject to the compensation 
limitations of Rule 2710 or Rule 2810.
* * * * *

2710. Corporate Financing Rule--Underwriting Terms and Arrangements

(a) Definitions
    For purposes of this Rule, the following terms shall have the 
meanings stated below. The definitions in Rule 2720 are incorporated 
herein by reference.
    (1) through (2) No Change.
(3) Offering Proceeds
    The maximum [P]public offering price of all securities to be 
offered or that are sold in a public offering [to the public], not 
including securities subject to any overallotment option, securities to 
be received by the underwriter and related persons, or securities 
underlying other securities.
    (4) No Change.
(5) Participation or Participating in a Public Offering
    Participation in the preparation of the offering or other 
documents, participation in the distribution of the offering on an 
underwritten, non-underwritten, principal, agency or any other basis, 
participation in a shelf takedown that does not satisfy the 
requirements of the market transactions exemption; furnishing of 
customer and/or broker lists for solicitation, or participation in any 
advisory or consulting capacity to the issuer related to the offering, 
but not the preparation of an appraisal in a savings and loan 
conversion or a bank offering or the preparation of a fairness opinion 
pursuant to SEC Rule 13e-3.
(6) Underwriter and Related Persons
    Consists of underwriter's counsel, financial consultants and 
advisors, finders, any participating member, and any other persons 
[related to any participating member] that receive any item of value 
that would be considered underwriting compensation.
(7) Listed Securities
    Securities meeting the listing standards to trade on the national 
securities exchanges identified in SEC Rule 146, markets registered 
with the SEC under Sections 6 or 11A of the [Exchange] Act, and any 
offshore market that is a ``designated offshore securities market'' 
under Rule 902(b) of SEC Regulation S.
    (8) through (9) No Change.
(10) Required Filing Date
    The required filing date shall be the dates provided in 
subparagraph (b)(4), and for a public offering exempt from filing under 
subparagraph (b)(7), the required filing date for purposes of 
subparagraphs (d) and (g) shall be the date the public offering would 
have been [be] required to be filed with [the] NASD but for the 
exemption.

(11) Securities Act

    The Securities Act of 1933, as amended.

(12) Shelf Offering

    Any offering of securities registered with the SEC and offered 
pursuant to SEC Rule 415, under the Securities Act.



    (13) Takedown
    In connection with a shelf offering, the securities purchased by a 
member in a principal transaction or the securities sold by a member in 
an agency transaction.
(b) Filing Requirements
(1) through (3) No change
(4) Requirement for Filing
    (A) Unless filed by the issuer, the managing underwriter, or 
another member, a member that anticipates participating in a public 
offering of securities subject to this Rule shall file with NASD the 
documents and information with respect to the offering specified in 
subparagraphs (5) and (6) below:
    (i) No Change.

[[Page 70737]]

    (ii) if not filed with or submitted to any regulatory authority, at 
least fifteen business days prior to the anticipated date on which 
offers will commence[.]; or
    (iii) in the case of a shelf offering, before the member sells 
securities in any takedown required to be filed.
    (B) No [sales of securities subject to this Rule shall commence] 
member shall commence selling in any offering required to be filed by 
this Rule, Rule 2720 or Rule 2810 unless:
    (i) No Change.
    (ii) NASD has provided an opinion to the member or that covers the 
member stating that it has no objections to the proposed underwriting 
and other terms and arrangements[ or an opinion that the proposed 
underwriting and other terms and arrangements are unfair and 
unreasonable]. If NASD's opinion states that the proposed underwriting 
and other terms and arrangements are unfair and unreasonable, the 
member may file modifications to the proposed underwriting and other 
terms and arrangements for further review.
    (C) Any member acting as a managing underwriter or in a similar 
capacity that has been informed of an opinion by NASD[,or a 
determination by the appropriate standing committee of the Board of 
Governors,] that the proposed underwriting terms and arrangements of a 
proposed offering are unfair or unreasonable, and the proposed terms 
and arrangements have not been modified to conform to the standards of 
fairness and reasonableness, shall notify all other members proposing 
to participate in the offering of that opinion or determination at a 
time sufficiently prior to the effective date of the offering or the 
commencement of sales so the other members will have an opportunity as 
a result of specific notice to comply with their obligation not to 
participate in any way in the distribution of a public offering 
containing arrangements, terms and conditions that are unfair or 
unreasonable.
    (5) through (6) No Change.
(7) Offerings Exempt from Filing
    Notwithstanding the provisions of subparagraph (1) above, documents 
and information related to the following public offerings need not be 
filed with NASD for review, unless subject to the provisions of Rule 
2720. However, it shall be deemed a violation of this Rule or Rule 
2810, for a member to participate in any way in such public offerings 
if the underwriting or other arrangements in connection with the 
offering are not in compliance with this Rule or Rule 2810, as 
applicable:
    (A) securities offered by a corporate, foreign government or 
foreign government agency issuer which has unsecured non-convertible 
investment grade rated debt with a term of issue of at least four (4) 
years, or unsecured non-convertible investment grade rated preferred 
securities, [rated by a nationally recognized statistical rating 
organization in one of its four (4) highest generic rating categories,] 
except that the initial public offering of the equity of an issuer is 
required to be filed[;].
    (B) investment grade rated non-convertible debt securities and 
investment grade rated non-convertible preferred securities [rated by a 
nationally recognized statistical rating organization in one of its 
four (4) highest generic rating categories;].
    [(C) offerings of securities:]
    [(i) registered with the Commission on registration statement Forms 
S-3 or F-3 pursuant to the standards for those Forms prior to October 
21, 1992 and offered pursuant to SEC Rule 415 adopted under the 
Securities Act of 1933, as amended; or]
    [(ii) of a foreign private issuer incorporated or organized under 
the laws of Canada or any Canadian province or territory, and is 
registered with the Commission on Form F-10 pursuant to the standards 
for that Form approved in Securities Act Release No. 6902 (June 21, 
1991) and offered pursuant to Canadian shelf prospectus offering 
procedures;]
    [(D)] (C) securities offered pursuant to a redemption standby 
``firm commitment'' underwriting arrangement registered with the 
Commission on Forms S-3, F-3 or F-10 (only with respect to Canadian 
issuers)[;].
    [(E)] (D) financing instrument-backed securities which are 
investment grade rated [by a nationally recognized statistical rating 
organization in one of its four (4) highest generic rating categories]; 
and
    [(F)] (E) exchange offers of securities where:
    (i) No change.
    (ii) the company issuing securities qualifies to register 
securities with the Commission on registration statement Forms S-3, F-
3, or F-10, pursuant to the standards for those Forms as set forth in 
[subparagraphs (C)(i) and (ii) of this paragraph; and] subparagraph 
10(D) below; and
    [(G)] (F) offerings of securities by a church or other charitable 
institution that is exempt from SEC registration pursuant to Section 
3(a)(4) of the Securities Act.
    (8) No change.
(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 NASD 
for review:
    (A) through (H) No change.
    (I) any exchange offer, merger and acquisition transaction, or 
other similar corporate reorganization involving an issuance of 
securities that results in the direct or indirect public ownership of 
the member; [and]
    (J) any offerings of a similar nature that are not exempt under 
subparagraph (7) or (8) above[.]; and
    (K) shelf offerings pursuant to paragraph (10) below, and any shelf 
offering that is the initial public offering of the equity of an 
issuer.
(10) Shelf Offerings.
    (A) Filing Requirement: a member that is required under 
subparagraph (4) above to file with NASD documents and information 
required in subparagraphs (5) and (6) shall make an ``Initial Member 
Filing'' or, if another member has made the Initial Member Filing, a 
``Subsequent Filing,'' and shall receive a no-objections opinion 
pursuant to such filing prior to its participation in the shelf 
offering.
    (i) Issuer Filing: Documents and information that are required to 
be filed by members under subparagraphs (5) and (6) may be filed by the 
issuer. The fees specified in Section 6 of Schedule A to the NASD By-
Laws will be required in connection with such a filing;
    (ii) Initial Member Filing: Unless made by another member, prior to 
participating in a shelf offering a member shall make an Initial Member 
Filing of the documents and information required under subparagraphs 
(5) and (6) and pay the filing fee specified in Section 6 of Schedule A 
to the NASD By-Laws prior to participating in a takedown. Documents and 
Information previously provided to NASD in an Issuer Filing may be 
incorporated in the Initial Member Filing and no additional filing fees 
will be required if the entire filing fee has been paid in connection 
with an Issuer Filing;
    (iii) Subsequent Member Filing: if the Initial Member Filing has 
been made in connection with a shelf offering, a member that has not 
already received a ``no-objections'' opinion under subparagraph 
(b)(4)(B) shall make a Subsequent Member Filing of the documents and 
information specified in subparagraphs (5) and (6) prior to its 
participation in a takedown. Information previously submitted in an 
Issuer Filing or Initial Member Filing may be incorporated into the

[[Page 70738]]

Subsequent Member Filing and no additional filing fees will be due if 
the entire fee due under Schedule A to the NASD By-Laws has already 
been paid in connection with an Issuer Filing or Initial Member Filing;
    (iv) ``Life of Shelf'' Clearance: A member that has received a no-
objections opinion in connection with a shelf registered offering shall 
not be required to make a Subsequent Member Filing in order to 
participate in future takedowns provided that:
    a. the shelf registration statement discloses a maximum amount of 
underwriting compensation that will not be exceeded by participating 
members in takedowns; and
    b. there is no material change to the information provided in the 
filing on which NASD relied in issuing the no-objections opinion.
    (B) Market Transactions Exemption: a member may participate in a 
takedown of equity securities or convertible-to-equity debt securities 
and be exempt from the filing requirement in subparagraphs (4) and 
(10)(A) above if the following conditions are met:
    (i) the shelf offering is not the initial public offering of the 
issuer's equity securities, and does not occur within 90 days of the 
issuer's initial public offering;
    (ii) the security is listed on The Nasdaq Stock Market or a 
national securities exchange;
    (iii) agency and principal transactions are unsolicited and do not 
exceed the greater of:
    a. 2% of the average daily trading volume (ADTV) on the dates of 
the transactions, calculated in compliance with SEC Regulation M, or
    b. 10,000 shares, or securities convertible or exercisable into 
such number of shares;
    (iv) the participating member has not entered into any 
underwriting, distribution, equity line or other agreement with the 
issuer or any selling securityholder with respect to the sale of the 
securities offered;
    (v) the participating member does not receive compensation 
(including the mark-up, mark-down, or commission) that exceeds the 
amount permitted under NASD IM-2440, the Mark-Up Policy;
    (vi) the participating member has not acquired any item of value in 
connection with its participation in the shelf offering (excluding a 
mark-up, mark-down, or commission); and
    (vii) the participating member is not an affiliate of the issuer 
and does not have a conflict of interest with the issuer under Rule 
2720.
    (C) Seasoned Issuer Exemption: notwithstanding subparagraphs (4) 
and (10)(A) above, documents and information related to the following 
shelf offerings need not be filed with NASD for review, unless the 
shelf offering is subject to the provisions of Rule 2720:
    (i) offerings by a company that has been subject to the reporting 
requirements of Section 12 or 15(d) of the Act for at least 36 calendar 
months, is current in its reporting obligations, and at the time of the 
takedown, either:
    a. has registered the offering with the Commission on registration 
statement Form S-3 and the aggregate market value of the company's 
voting stock held by non-affiliates is at least $150 million or, 
alternatively, at least $100 million and the stock has had an annual 
trading volume of at least three million shares; or
    b. has registered the offering with the Commission on registration 
statement Form F-3 and the aggregate market value worldwide of the 
company's voting stock held by non-affiliates is the equivalent of at 
least $300 million;
    (ii) offerings registered with the Commission on Form F-10 by a 
foreign private issuer incorporated or organized under the laws of 
Canada or any Canadian province or territory and offered pursuant to 
Canadian reporting requirements for at least 36 calendar months and at 
the time of the takedown, is current in its reporting obligations and 
the aggregate market value of the company's outstanding equity is at 
least (CN) $360 million.
    (10) and (11) renumbered as (11) and (12).
(c) Underwriting Compensation and Arrangements
    (1) No change.
(2) Amount of Underwriting Compensation
    (A) through (E) No change.
    (F) For purposes of determining the amount of underwriting 
compensation in a shelf offering, the discount or commission paid to 
participating members shall be aggregated with all other items of value 
received or to be received in connection with the takedown and shall 
consist of:
    (i) in a transaction governed by an agreement, the discount from 
the public offering price, or the discount from a reasonable measure of 
the market price, or the commission specified by the agreement that 
governs the transaction;
    (ii) in an agency transaction not governed by an agreement, the 
amount of the actual commission that is received or to be received in 
connection with the sale of the securities;
    (iii) in a principal transaction when the discount from the public 
offering price is not specified in an agreement or the transaction is 
not governed by an agreement, the difference between the purchase price 
of the security and the sale price of the security. If there is a bona 
fide independent market for the security, or the security is an 
Actively-Traded Security as defined in Rule 2720 and SEC Regulation M, 
respectively, the discount or commission may be calculated as the 
difference between the purchase price and the:
    a. ``prevailing market price'' in the principal market for the 
security at the time of purchase, as calculated by reference to IM-
2440, the Mark-Up Policy; or
    b. initial resale price of the security, so long as:
    1. the purchase price of the takedown is of at least $10 million 
but no more than $50 million of securities and at least 50% of the 
securities are sold at the initial resale price or at lower prices; or
    2. the purchase price of the takedown exceeds $50 million of 
securities and at least 25% of the securities are sold at the initial 
resale price or at lower prices.
(3) Items of Value
    (A) For purposes of determining the amount of underwriting 
compensation received or to be received by the underwriter and related 
persons pursuant to subparagraph (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 public offering, as determined pursuant to paragraph (d) below 
shall be included:
    (i) through (iv) No change.
    (v) wholesaler's fees[;], whether in the form of cash, securities 
or any other item of value;
    (vi) through (xiii) No Change.
    (B) No Change.
(d) Determination of Whether Items of Value Are Included In 
Underwriting Compensation
(1) Pre-Offering Compensation
    (A) All items of value received and all arrangements entered into 
for the future receipt of an item of value by the underwriter and 
related persons during the period commencing 180 days immediately 
preceding the required filing date of the registration statement or 
similar document pursuant to subparagraph (b)(4) above until the date 
of effectiveness or commencement of

[[Page 70739]]

sales of the public offering will be considered to be underwriting 
compensation in connection with the public offering. For a shelf 
offering that has been declared effective and for which sales have 
commenced, this period will be the 180 days immediately preceding the 
first takedown in which the member participates following the receipt 
of the item of value.
    (2) through (5) No change.
(e) Valuation of Non-Cash Compensation
    For purposes of determining the value to be assigned to securities 
received as underwriting compensation, the following criteria and 
procedures shall be applied.
(1) Limitation on Securities Received Upon Exercise or Conversion of 
Another Security
    Neither [An] underwriter [and] nor related person may [not] receive 
a security (including securities in a unit), a warrant for a security, 
or a security convertible into another security as underwriting 
compensation in connection with a public offering unless:
    (A) through (B) No Change.
    (2) through (3) No Change.
(4) Valuation Discount For Securities With a Longer Resale Restriction
    A lower value equal to 10% of the calculated value shall be 
assigned [deducted] for each 180-day period that the securities or 
underlying securities are restricted from sale or other disposition 
beyond the 180-day period of the lock-up restriction required by 
subparagraph (g)(1) below. The transfers permitted during the lock-up 
restriction by subparagraphs (g)(2)(A)(iii)-(iv) are not available for 
such securities.
(5) Valuation of Items of Value Acquired in Connection with a Fair 
Price Derivative or Debt Transaction
    Any debt or derivative transaction acquired or entered into at a 
``fair price'' as defined in subsection (a)(9) and any item of value 
received in or receivable in the settlement, exercise or other terms of 
such debt or derivative transaction shall not have a compensation value 
for purposes of determining underwriting compensation. If the actual 
price for the debt or derivative security is not a fair price, 
compensation will be calculated pursuant to this subsection (e) or 
based on the difference between the fair price and the actual price.
    (f) No Change.
(g) Lock-Up Restriction on Securities
(1) Lock-Up Restriction
    In any public equity offering, other than a public equity offering 
by an issuer that can meet the requirements in subparagraphs 
(b)[(7)](10)(C)(i) or (ii) any common or preferred stock, options, 
warrants, and other equity securities of the issuer, including debt 
securities convertible to or exchangeable for equity securities of the 
issuer, that are unregistered and acquired by an underwriter and 
related person(s) during 180 days prior to the required filing date, or 
acquired after the required filing date of the registration statement 
and deemed to be underwriting compensation by NASD, and securities 
excluded from underwriting compensation pursuant to subparagraph (d)(5) 
above, shall not be sold during the offering, or sold, transferred, 
assigned, pledged, or hypothecated, or be the subject of any hedging, 
short sale, derivative, put, or call transaction that would result in 
the effective economic disposition of the securities by any person for 
a period of 180 days immediately following the date of effectiveness or 
commencement of sales of the public offering, except as provided in 
subparagraph (g)(2) below. The ``effective date of the offering'' for 
purposes of a shelf-registered offering shall be the day following the 
last takedown for which the participating member received securities as 
compensation.
(2) Exceptions to Lock-Up Restriction
    Notwithstanding subparagraph (g)(1) above, the following shall not 
be prohibited:
    (A) the [transfer] disposition of any security:
    (i) No Change.
    (ii) to any member participating in the offering and the officers 
or partners thereof, if all of the securities [so transferred] remain 
subject to the lock-up restriction in subparagraph (g)(1) above for the 
remainder of the time period;
    (iii) if the aggregate amount of securities of the issuer held by 
the underwriter [or] and related person do not exceed 1% of the 
securities being offered;
    (iv) through (viii) No Change.
    (B) No Change.
(h) Proceeds Directed to a Member
    (1) through (2) No Change.
(3) Exception From Compliance
    The provisions of subparagraphs (h)(1) and (2) shall not apply to:
    (A) No Change.
    (B) an offering of securities exempt from registration with the 
Commission under Section 3(a)(4) of the Securities Act [of 1933];
    (C) through (D) No Change.
    (i) through (j) No change.
* * * * *

2810. Direct Participation Programs

    (a) through (b) No change.
    (c) Filing Requirements: Coordination with Rule 2710.
    All offerings of securities included within the scope of this Rule 
shall be subject to the provisions of Rule 2710, and documents and 
filing fees relating to such offerings shall be filed with NASD 
pursuant to the provisions of that Rule and Section 6 of Schedule A to 
the NASD By-Laws.
    (c) renumbered as (d).
    (d) renumbered as (e).
* * * * *

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 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 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
    NASD is proposing to amend NASD Rules 2710, 2810, IM-2440, and 
Schedule A to the NASD By-Laws to address the filing requirements and 
the regulation of public offerings of securities registered with the 
Commission and offered by members pursuant to SEC Rule 415 (``shelf 
offerings''). NASD Rules 2710, 2720 and 2810 (collectively, the 
``Corporate Financing Rules'') require NASD members that anticipate 
participating in a public offering of securities, including shelf 
offerings, to make a filing with NASD's Corporate Financing Department 
(``Department''). The Department reviews the proposed underwriting 
terms and other required information submitted by members.\5\

[[Page 70740]]

Members are required to receive the Department's opinion of ``no-
objections'' to the offering terms prior to participating in the 
offering.
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    \5\ NASD Rule 2710 regulates the underwriting terms and 
arrangements of most public offerings of securities sold through 
NASD members. The underwriting terms and arrangements of Direct 
Participation Program (DPP) offerings are regulated by NASD Rule 
2810. NASD Rule 2720 regulates public offerings when the securities 
offered are those of a member, the member's parent company, an 
affiliate of the member, or a company with which a member has a 
conflict of interest.
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    In September 2001, NASD published Notice to Members 01-59 
requesting comment on proposed amendments to the Corporate Financing 
Rules to modernize and improve the regulation of shelf offerings. NASD 
received six comment letters that generally supported the proposal and 
the need to amend the rules.\6\ However, several commenters also were 
concerned that the new approach, with its emphasis on ``Notice 
Filings'' after each takedown off the shelf, might prove more 
burdensome and expensive than the current rules. The Corporate 
Financing Committee also considered the proposal at several meetings. 
At its May 2002 meeting, the Committee also expressed concern that the 
Notice Filing approach may not be as efficient and yield the benefits 
it was designed to provide.
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    \6\ Comment letters were received from the Committee on 
Securities Regulation of the New York State Bar Association, the 
Capital Markets Committee of the Securities Industry Association, 
and from the law firms of Fried, Frank, Harris, Shriver & Jacobson, 
Simpson Thacher & Bartlett, Sullivan and Cromwell, and Shearman and 
Sterling.
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    In response to the comments received, NASD staff revised the 
proposal. In the proposed rule change, NASD has retained beneficial 
aspects of the original proposal (e.g., the new calculation 
methodologies for determining underwriting compensation, the Market 
Transactions Exception), and eliminated those other aspects that raised 
legitimate concerns (e.g., Notice Filings, special filing requirements 
for Thinly Traded Issuers). In addition, NASD staff modified and 
clarified the filing requirements.
    a. Background. When a member anticipates participating in a shelf 
offering, the Corporate Financing Rules generally require the member to 
file the shelf offering with the Department. Many shelf offerings are 
not underwritten, however, and members have requested guidance in the 
past concerning their filing obligations in shelf offerings. In 1988, 
NASD published Notice to Members 88-101 (``NtM 88-101'') to clarify the 
filing requirements that apply to shelf offerings. The Notice states 
that the participation of a member in any offering of securities 
distributed pursuant to SEC Rule 415 constitutes participation in a 
public offering. The Notice also states that any member who is named as 
a potential distribution participant in the registration statement or 
who participates in any transaction that takes securities off the shelf 
is responsible for ensuring that a timely filing is made with the 
Department. Notice to Members 01-59 reiterated this position: 
``Accordingly, NASD Regulation considers shelf offerings to be public 
offerings within the scope of the Corporate Financing Rules, and 
members that take securities off a shelf and sell them to the public 
must file information about the offering with the Department.''
    While these Notices indicate that shelf offerings are public 
offerings that must be filed with the Department, the requirement to 
file as currently drafted also undermines some of the flexibility 
intended by the shelf offering process and has created some practical 
issues and uncertainties for members that sell shelf-registered 
securities:
    <bullet> Members have been unclear at times whether the sale by a 
member of a small amount of shelf-registered securities offered by an 
issuer or a selling security holder triggers a filing obligation, and 
if so, at what point should the member make a filing. Members have 
questioned whether the execution of unsolicited transactions would 
constitute ``participation in a public offering'' for purposes of the 
Corporate Financing Rules.\7\
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    \7\ Rule 2710(b)(4)(A) requires a member that anticipates 
participating in a public offering of securities subject to the Rule 
to make a filing with NASD. ``Participation in a public offering'' 
is defined in Rule 2710(a)(4) as ``* * * participation in the 
distribution of the offering on an underwritten, non-underwritten, 
or any other basis * * *.'' Rule 2720 contains a definition of 
``public offering'' that is incorporated by reference in Rule 2710. 
That definition broadly defines the term as ``any primary or 
secondary distribution of securities made pursuant to a registration 
statement or offering circular * * * and all other securities 
distributions of any kind whatsoever * * *.'' NASD does not define 
the term ``distribution'' and uses this term in the general sense.
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    <bullet> When several members acting independently sell securities, 
it may be unclear which member must make the requisite filing with the 
Department.
    <bullet> Many shelf offerings are initially filed with the SEC by 
issuers before they enter into underwriting agreements with members. 
Because the NASD filing requirements are the responsibility of members 
rather than issuers, few issuers file the offering with the Department. 
Those issuers that do file with the Department often cannot identify, 
at the time of filing, the members that will be engaged in sales, nor 
will they have information regarding underwriting discounts, 
commissions or other terms and arrangements.\8\
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    \8\ In addition, issuers may file shelf-registered offerings on 
behalf of selling securityholders, in anticipation of member 
participation in the sale of the registered securities. Because the 
timing and amount of securities sold off the shelf will be under the 
control of the securityholders, the issuer may have little or no 
information regarding the selling arrangements between the 
securityholders and members. In response to these uncertainties, 
NASD's proposed rule change would provide clear-cut filing 
responsibilities to all members or exempt them from filing under the 
proposed market transactions exception.
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    <bullet> The Department's review processes could delay the 
offering, thus affecting the registrant's ability to take advantage of 
market opportunities that shelf registration is designed to provide. 
This can occur when members do not promptly file shelf-registered 
offerings when they anticipate they will participate in a takedown, 
when information required by the rules is not readily available, or due 
to mistakes in the filing process or transmission of filing fees.
    The proposed rule change addresses these issues by clearly 
delineating the filing responsibility for members that participate in 
shelf offerings and providing a streamlined, more automated process for 
all filers, including issuers. In addition, the proposed rule change 
provides a specific filing exemption for members that engage in 
occasional unsolicited takedown transactions, and thus members would 
not have to file when they participate in shelf takedowns that meet the 
criteria in the exemption. The proposed rule change is intended to 
provide clear guidance to members with regard to their filing 
obligations.
    The proposed rule change also addresses the determination of 
underwriting compensation in shelf offerings. From time to time members 
have requested guidance on the appropriate calculation of underwriting 
compensation in shelf takedown transactions. The calculation 
methodology to apply to a particular takedown transaction can vary 
because of the many kinds of transactions in which shelf-registered 
securities are distributed. For example, shelf takedowns can be 
principal or agency transactions, may be sold to investors at a fixed 
price or at a discount to the market price, or sold at prevailing 
market prices. Shelf takedowns may also be made pursuant to an 
underwriting agreement or without any written agreement, and the 
agreements may involve complex formulas, such as those found in equity 
line transactions. In the proposed rule change, NASD proposes 
alternative methods to

[[Page 70741]]

calculate the discount or commission received by members that 
participate in shelf offerings. The alternatives are intended to take 
into account the different ways members sell securities in shelf 
offerings and to recognize the effect of transaction size and whether 
the security has an actively traded market.
    The proposed rule change would also make several conforming and 
clarifying amendments to the Corporate Financing Rules. NASD proposes 
to amend Rule 2710 to clarify how to apply the review period for 
underwriting compensation when shelf takedowns occur long after a shelf 
registration statement has been declared effective, and to clarify the 
application of the lock-up provisions in shelf offerings. We also 
propose to amend Rule 2810 so that DPP offerings that are registered 
pursuant to SEC Rule 415 qualify for the new regulatory treatment of 
shelf offerings under Rule 2710. The proposed rule change also modifies 
NASD's Mark-Up Policy in IM-2440 to more specifically delineate those 
shelf offerings that are subject to the Policy.\9\
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    \9\ The proposed amendments to IM-2440, the Mark-Up Policy, 
clarify that Rule 2710 will govern member compensation in all shelf 
takedowns with the exception of those that comply with the 
requirements of the Market Transactions Exemption (MTE). Members 
will not be required to file takedowns that comply with the MTE, and 
member compensation in such takedowns will be subject to the Mark-Up 
Policy instead of Rule 2710. These clarifications are particularly 
significant in light of the decision on November 14, 2003 by NASD's 
National Adjudicatory Council (NAC) in the Matter of Department of 
Enforcement v. Walsh Manning Securities, LLC et. al. (NASD Complaint 
No. CAF000013), in which the NAC stated in dicta that certain shelf 
offerings were not subject to Rule 2710 and were instead subject to 
the Mark-Up Policy. Although the complaint alleged violations of the 
Mark-Up Policy, Walsh Manning's participation in takedowns from a 
selling securityholder shelf offering would have triggered a filing 
requirement under the proposed rule change. This is because, among 
other things, Walsh Manning engaged in solicited transactions and 
sold securities in an amount that would have exceeded the parameters 
of the MTE. Therefore, Walsh Manning would have had to file the 
offering for review under Rule 2710 if the proposed rule change had 
been in effect at the time.
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    b. Filing Process. Under the proposed rule change, the general 
filing requirement for shelf offerings would be the same as that for 
all other public offerings, i.e., a member that anticipates 
participating in a shelf offering in any capacity shall file required 
information with the Department, unless a filing exemption is 
available. Unlike the current system, however, the information required 
in a filing would differ depending on whether a filing is an ``initial 
filing'' or a ``subsequent filing'' of a shelf offering. Because 
members would be able to rely on information contained in the initial 
filing, generally less information will be required in a subsequent 
filing. In addition, if an issuer makes a filing before the initial 
filing by a member, the information and documents filed by the issuer 
(``issuer filing'') would be incorporated into the member's initial 
filing, further reducing the filing obligation of the member. In 
keeping with current practice, if the full filing fee has already been 
paid by the issuer, no filing fee would be required of the member 
making the initial filing. As with other filings made under Rule 2710, 
members would be required to file shelf offerings with the Department 
electronically through the COBRADesk system.
    Initial Member Filings: Under the proposed rule change, before a 
member participates in a shelf offering subject to a filing 
requirement, the member would be required to review a COBRADesk screen 
to see if an initial filing has already been made on web COBRADesk. If 
the initial filing has not already been made, the member will be 
required to make the initial filing with the Department and pay the 
filing fee based on the aggregate value of the securities registered on 
the registration statement.\10\ The Department will review the filing 
and issue a no-objections letter with regard to the member's 
participation in the offering. If the maximum amount of compensation 
that the issuer or selling securityholders will pay the member in 
connection with takedowns off the shelf is approved and disclosed in 
the registration statement or in an amendment or supplement to the 
registration statement, the member will be able to rely on the no-
objections opinion for ``the life of the shelf,'' as long as there are 
no material changes that would affect the Department's review and 
clearance.\11\ If more than one member has entered into an underwriting 
agreement at the time the initial filing is made, the Department will 
issue a no-objections opinion that applies to every member disclosed in 
the initial filing or that executes the underwriting agreements that 
were reviewed in connection with the filing. If the maximum amount of 
compensation that any member will receive for selling the securities 
offered by the issuer or selling securityholders in takedowns off the 
shelf is disclosed in the registration statement or in an amendment or 
supplement to the registration statement, every member covered by the 
no-objections opinion will be able to rely on the no-objections opinion 
for ``the life of the shelf,'' subject to there being no material 
change to the terms and conditions of the Department's review and 
clearance.\12\
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    \10\ This is consistent with current procedures. Members from 
time to time request that they be able to pay filing fees only with 
regard to the value of securities the particular member takes off 
the shelf, but that is not permitted under the current rules, and 
would require members and issuers to pay multiple filing fees per 
shelf offering, creating administrative problems and delaying 
takedowns. In addition, if an issuer files documents and information 
with NASD, the filing fee paid by the issuer would satisfy the 
member's obligation to pay the filing fee.
    \11\ Rule 2710 requires the disclosure of all underwriting 
compensation in the prospectus. As part of its review of a filing, 
NASD would require the maximum compensation to be received by 
members be disclosed before issuing an opinion of no-objections 
regarding the offering.
    \12\ For example, NASD would consider changes such as the 
following to be material: the receipt of additional items of value 
by the underwriter and related persons that would be deemed 
underwriting compensation and would require an amendment to the 
offering documents, a modification to compensation arrangements 
already reviewed and approved and the existence or development of a 
potential conflict of interest that was not reviewed. A subsequent 
filing would be required in these instances.
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    After it issues a no-objections opinion, the Department intends to 
post on a screen in COBRADesk the name of the issuer, the SEC Accession 
number of the base prospectus in EDGAR, and the identity of all members 
who have received no-objections clearance with regard to takedowns off 
that shelf. NASD intends to require and maintain information 
identifying each member that will participate in an offering in the 
COBRA database. All registered users of COBRAdesk will have access to 
the ``cleared members'' screen.
    Subsequent Filings: A member that was not cleared to participate in 
the initial member filing but that wants to participate in a subsequent 
takedown would have to make a ``subsequent filing.'' In that case, a 
member that wants to participate in a shelf takedown first would check 
web COBRADesk to see if the offering has been filed with NASD. If the 
offering has been filed, the member would check the ``cleared members'' 
screen to see if an initial member filing has been made. If the initial 
member filing was made and one or more members were issued a no-
objections opinion, these members would be identified. If the member 
that wants to participate in the takedown is not in the ``cleared 
members'' screen, such member would have to make a subsequent filing 
with regard to its proposed takedown from the shelf registration. If, 
on the other hand, the member has already received a ``life of shelf'' 
clearance, it would be listed on the ``cleared members'' screen and no 
further filing would be required, unless

[[Page 70742]]

a material change takes place in the future that would require 
additional review or another subsequent filing. Members are obligated 
under the Corporate Financing Rules to submit modifications to 
underwriting compensation or new items of compensation for review after 
the issuance of a no-objections opinion, and similarly, if a conflict 
of interest developed, this would be deemed a material change in the 
terms of the approval. Therefore, ``life of shelf'' clearance means 
that if a member remains in compliance with the terms of its clearance 
then it would not need to file again concerning any takedown from a 
shelf offering for which the member appears in the ``cleared members'' 
screen.
    If an initial member filing has been made, but a particular member 
is not listed on the cleared members screen, then that member would 
have to make a subsequent filing. No fee would be charged in connection 
with such a filing, however.\13\ The member making the subsequent 
filing would be required to provide certain summary information and 
representations through web COBRADesk, and receive a no-objections 
opinion prior to participating in the offering.
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    \13\ An initial COBRADesk filing cannot be submitted unless the 
required filing fee is transmitted. Therefore, a fee based on the 
aggregate amount of securities registered would have already been 
paid in connection with the initial filing. After the fee for all of 
the securities registered for sale is paid, no further filing fees 
would be required. If, however, a subsequent filing includes an 
amendment that increases the size of the offering or if there is 
otherwise a balance due, such fees would be required in connection 
with the subsequent filing.
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    Expedited Reviews: In response to comments requesting expedited 
treatment for shelf offerings, NASD proposes to develop an automated 
review and clearance (ARC) process for Subsequent Member Filings of 
shelf offerings that meet eligibility criteria. Although certain 
offerings, such as those that require a qualified independent 
underwriter to resolve conflicts of interest, would not be eligible for 
an automated clearance generated by web COBRADesk, the staff 
anticipates that ARC would expedite a majority of Subsequent Member 
Filings. The system generated no-objections letter would be automatic, 
if all of the required information is provided and there are no review 
issues such as proposed compensation that exceeds the maximum allowable 
amount. The system would recognize when a Subsequent Member Filing 
satisfies these criteria and the member would be displayed in the 
``cleared member'' screen automatically. ARC would permit filers to 
expedite their own reviews, as the system would issue the no-objections 
opinion to the members on a 24-hour basis as soon as the requirements 
for clearance are satisfied. Such approvals would generally be subject 
to spot checks and the routine member examination process with regard 
to the veracity of undertakings and information provided to NASD.
    c. Market Transactions Exception (MTE). The MTE was designed to 
provide an exception from the filing requirements under the Corporate 
Financing Rules for members that participate in takedown transactions 
that are more like ordinary trading transactions than public offerings. 
The original proposal published in 2001 was well received by the 
commenters and the Committee, although many believed that it was too 
complex and that it lacked predictability as it exempted some, but not 
all transactions governed by underwriting agreements. Accordingly, NASD 
has simplified the MTE by excluding underwritten transactions and 
deleting some of the volume limitations published in Notice to Members 
01-59, and clarified that agency and principal transactions must be 
unsolicited and may not exceed the greater of 2% of the ADTV for the 
security (calculated in accordance with SEC Regulation M) or 10,000 
shares, on any given trading day.
    The requirement that transactions be unsolicited applies to both 
sides of a securities transaction. For example, in a principal 
transaction, the member could neither solicit a selling securityholder 
to sell shelf-registered securities to it nor solicit a purchaser for 
such securities. Similarly, in an agency transaction, a member could 
not solicit an issuer or selling securityholder to sell, nor could it 
solicit an investor to purchase such securities. The MTE provides an 
exemption to members that engage in a variety of takedown transactions 
such as unsolicited brokerage transactions, principal transactions as a 
result of unsolicited customer orders and transactions in member 
proprietary accounts, subject to the 2% or 10,000 share daily limit.
    Market making transactions in a security for which a member is a 
registered market maker would generally not constitute participation in 
a public offering, and NASD would not consider a posted bid or offer by 
a market maker in the ordinary course of its business to constitute 
solicitation for purposes of the MTE.\14\
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    \14\ A market maker that engages in solicited transactions 
involving securities offered by means of a shelf registration 
statement may have to file. For example, if a market maker engaged 
in solicited purchases of securities from selling securityholders 
who were offering their securities pursuant to a prospectus, or that 
engaged in the solicitation of retail investors to purchase such 
securities may incur a filing obligation. Market makers that engage 
in such transactions may in fact be participating in the 
distribution of a public offering, and may have to comply with the 
requirements of SEC Regulation M.
---------------------------------------------------------------------------

    With one exception, the remaining MTE requirements contained in the 
proposed rule change were published in Notice to Members 01-59, and 
include the following:\15\
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    \15\ In response to comments from SEC staff, NASD has narrowed 
the MTE to exclude securities quoted on the OTC Bulletin Board. The 
change was made in recognition that the NASD has a significant 
regulatory interest in the public distribution of shelf registered 
securities of thinly traded issuers quoted on the OTC Markets. 
Securities quoted on the OTCBB are generally less liquid and more 
volatile than those traded on the national securities exchanges and 
the Nasdaq Stock Market, and are not subject to the corporate 
governance and other qualification requirements of those markets.
---------------------------------------------------------------------------

    <bullet> The shelf offering or takedown cannot be the initial 
public offering of the issuer's equity securities, and cannot occur 
within 90 days of the issuer's initial public offering;
    <bullet> The security must be listed on The Nasdaq Stock Market or 
a national securities exchange;
    <bullet> The participating member cannot be an affiliate of the 
issuer nor have a conflict of interest with the issuer;
    <bullet> The transactions are subject to the 5% limitation under 
the Mark-Up Policy rather than the compensation limitations under the 
Corporate Financing Rule;\16\ and
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    \16\ NASD is proposing to amend its Mark-Up Policy, IM-2440, to 
clarify that shelf takedown transactions that come within the 
parameters of the MTE will be subject to the Mark-Up Policy, instead 
of the generally higher compensation limits available under Rule 
2710. NASD is also amending the Mark-Up Policy to specifically 
exclude shelf offerings that are subject to the compensation limits 
in Rule 2710, so that a takedown transaction by a member will either 
be subject to IM-2440 because it complies with the MTE, or it will 
be subject to the compensation limitations of Rule 2710. This is 
significant in light of the decision by NASD's National Adjudicatory 
Council (NAC) in Department of Enforcement v. Walsh Manning LLC et 
al. (November, 2003), in which the NAC stated in dicta that certain 
shelf offerings are not subject to Rule 2710 and affirmed that the 
takedowns in which Walsh Manning participated were subject to NASD's 
Mark-Up Policy instead of Rule 2710. Under the proposed rule change, 
Walsh Manning would have had to make a filing and its compensation 
would have been subject to Rule 2710, as the takedowns in which the 
firm participated would not have complied with the requirements of 
the MTE (see also footnote No. 5).
---------------------------------------------------------------------------

    <bullet> The participating member and its associated persons have 
not acquired an item of value in connection with their participation in 
the shelf offering that would be considered underwriting compensation 
(excluding a discount or commission that complies with the Mark-Up 
Policy).

[[Page 70743]]

    Based on these restrictions, members that anticipate selling shelf 
registered securities in non-underwritten transactions would be 
required to assess their intended participation level to determine 
whether the MTE (or other filing exemption) is available or whether an 
initial or subsequent filing should be made. Under the proposed rule 
change, a member that only intends to participate in transactions that 
satisfy the MTE requirements would not be required to make a filing. On 
the other hand, if a member anticipates that its level of participation 
would exceed the MTE parameters, the member should make a filing in 
advance of participation so that it can sell the securities in its 
accounts or the accounts of its associated persons or affiliates, 
taking advantage of market conditions without having to monitor 
compliance with various restrictions in the MTE or be subject to the 
delay of having to make a filing later. For example, a member should 
anticipate participating in a shelf offering by selling security 
holders if a substantial percentage of the securities offered by the 
selling security holders are held in the member's proprietary or 
customer accounts, such that it would be likely that proprietary 
transactions or transactions with its customers or affiliates would 
exceed 2% of the ADTV for the security on a given trading day.
    The proposed rule change would require each member that anticipates 
participating in a shelf offering takedown to determine whether a 
filing exemption or the MTE is available, and if not, whether its 
participation would require an initial filing, subsequent filing, or no 
filing at all, because the member is already included in the ``cleared 
members'' COBRADesk screen for that shelf offering and has ``life of 
shelf'' clearance.
    d. Underwriting Compensation. Under the proposed rule change, the 
amount of underwriting compensation in a shelf takedown governed by an 
underwriting, equity line, private investments in public equity (PIPE), 
or similar agreement between the issuer and any selling member would 
generally be based on the commission or discount set forth in the 
agreement. Such agreements may be firm commitment underwriting 
agreements, best-efforts underwriting agreements, equity lines of 
credit agreements, purchase agreements, or some other form of agreement 
for the sale of securities from a shelf registration. Where there may 
be some question concerning the appropriate valuation of a discount 
that is governed by a market-based formula or other more complex 
compensation arrangement, NASD intends to value the compensation based 
on its analysis of the arrangement, establishing an appropriate 
valuation through the review process.
    In the absence of an agreement governing a member's participation 
in a takedown of securities from a shelf registration, the proposed 
rule change provides alternative methods of calculation depending on 
whether a transaction was an agency or principal transaction. In an 
agency transaction, the underwriting compensation would be the amount 
of the commission that is added to the sale price of the securities 
paid by investors. In a principal transaction where the discount or 
commission is not specified by an agreement, NASD proposes three 
methodologies that members could utilize to determine compensation 
amounts: (1) The Resale Spread Method, in which the discount would be 
calculated as the difference between the purchase price of the 
securities off the shelf and their resale price; (2) the Prevailing 
Market Price Method, in which the discount would be calculated as the 
difference between the purchase price of the securities off the shelf 
and the ``prevailing market price'' of the security at the time of 
purchase; \17\ and (3) the Initial Resale Price Method, in which the 
discount would be calculated as the difference between the purchase 
price of the securities off the shelf and the price at which the first 
significant amount of sales after the takedown were executed. This 
third methodology would take into account market price movements that 
occur subsequent to a member's acquisition of the shelf-registered 
securities that could affect the discount, while ensuring that enough 
securities are sold to establish a reasonable, bona fide compensation 
calculation.
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    \17\ The prevailing market price would be determined pursuant to 
IM-2440, the Mark-Up Policy, and Notice to Members 92-16. Because 
this methodology would not work in a dominated or controlled market, 
we propose not to make it available for offerings of securities of 
thinly-traded issuers. The proposed rule change would require that 
the takedown security be an Actively Traded Security under 
Regulation M, or a security with a bona fide independent market, as 
defined in NASD Rule 2720(b) to qualify for the use of the 
Prevailing Market Price Method.
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    In a principal transaction, NASD anticipates that the Resale Spread 
method would be the primary method of calculating underwriting 
compensation, due to the market and transaction size requirements of 
the other methods. The Resale Price Method would generally be the most 
accurate measure of compensation regardless of the type of security or 
manner of distribution. The Prevailing Market Price and Initial Resale 
Price Methods would be available when members are subject to 
significant market risk due to the size of a takedown transaction or 
due to changes in market conditions (in an actively traded or bona fide 
independent \18\ market) during the distribution of a shelf takedown. 
NASD solicits comment on whether the eligibility criteria for these 
alternative calculation methodologies should be expanded from those 
currently proposed.
---------------------------------------------------------------------------

    \18\ Telephone conversation between NASD and Commission Staff on 
November 22, 2004.
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    NASD believes that these calculation methodologies will provide 
greater certainty to members and aid them in complying with the 
underwriting compensation requirements in connection with their 
participation in shelf offerings of securities.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act, which requires, among other 
things, that NASD's rules must 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. Specifically, we believe that the proposed rule change 
amends NASD's Corporate Financing Rule to provide greater clarity 
regarding when to make filings for shelf offerings while also ensuring 
that such filing requirements do not undermine the flexibility intended 
by the shelf registration process.

B. Self-Regulatory Organization's Statement on Burden on Competition

    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 NASD Notice 
to Members 01-59 (September 2001). NASD received six comment letters 
\19\ that generally supported the proposal and the need to amend the 
rules. However, several commenters also were concerned that the new 
approach might prove more burdensome and expensive than the current 
rules. Of the six comment letters received, three were in favor of the 
proposed rule change and

[[Page 70744]]

three viewed portions of the proposal unfavorably. NASD notes that the 
proposed rule change has undergone significant revisions since the 
publication of Notice to Members 01-59 and the comment letters were 
sent in response to the original proposal.
---------------------------------------------------------------------------

    \19\ See note 6, supra.
---------------------------------------------------------------------------

    In general, the commenters suggested further reductions in members' 
regulatory burdens and additional exemptions from the filing 
requirement. NASD does not believe that the more comprehensive 
exemptions suggested by some commenters, such as exemptions for all 
Form S-3 filings or all shelf offerings, is warranted. In addition, 
several commenters apparently misunderstood some aspects of the 
proposal. We describe the comments received and the way that the 
proposal was modified in response. We also describe several suggestions 
made by the commenters that NASD does not support because they would 
not improve the Corporate Financing Rules or would be inconsistent with 
their purpose.
    Filing Exemptions for Shelf Offerings: The proposed rule change 
eliminates the explicit references to ``pre-1992'' Form S-3 eligibility 
requirements in the filing exemption for securities registered on Forms 
S-3 (and F-3) offered pursuant to SEC Rule 415 while preserving the 
current filing requirements. This change adds clarity and simplicity as 
members or their counsel will no longer need to determine what 
eligibility criteria for those forms were in effect prior to October 
1992.
    Some commenters requested that NASD reduce the S-3/F-3 exemption 
requirements to 12 months reporting history and $75 million in public 
float, in line with the current eligibility requirements for those 
forms. NASD believes there are important regulatory purposes for the 
current filing requirements and accordingly, we do not propose to 
expand the S-3/F-3 exemption in response to the comments for the 
reasons described below:
    First, the 12-month reporting and $75 million float requirements 
currently in effect are criteria that determine whether an issuer is 
eligible for a particular type of registration form. The Commission 
does not exempt the companies that meet these eligibility requirements 
from filing a registration statement. Accordingly, the argument that 
NASD should exempt such offerings from filing, and that the Corporate 
Financing Rule's filing exemption should automatically track a 
registration form eligibility requirement is not persuasive. Second, 
SEC Regulation M requires a $150 million public float as a condition 
for exemption from trading restrictions during secondary distributions. 
This requirement supports NASD's position that issuers with less than a 
$150 million float are more prone to abusive or fraudulent trading and 
distribution activity. The SEC adopted SEC Regulation M in 1997, five 
years after the requirements for Forms S-3/F-3 were relaxed.
    Third, in Notice to Members 93-88, the NASD stated that competitive 
market forces and an active following in the investment community were 
important factors in its decision to exempt S-3/F-3 shelf 
offerings.\20\ When compared to issuers that are larger and have been 
reporting companies for a longer period, S-3/F-3 filers with only a 12-
month reporting history and a $75 million float would be less likely to 
be followed by investment professionals and investors, and would be 
more likely to have thinly-traded markets for their equity securities. 
Accordingly, we believe that such companies would be more likely to be 
subjected to unreasonable underwriting provisions. NASD has ongoing 
investigations that involve securities registered on Form S-3.\21\ The 
float and reporting history requirements in the Corporate Financing 
Rule provide the NASD with an opportunity to review these offerings 
prior to effectiveness and uncover problems with the compensation 
structure and other potential violations before members can sell the 
securities to the public.
---------------------------------------------------------------------------

    \20\ NASD is proposing to rescind an interpretation included in 
Notice to Members 93-88 (December 1993) that stated the filing 
exemption for S-3/F-3 shelf offerings was not available if the 
shelf-registered securities were sold in a conventional underwritten 
offering within a few days following the effective date of the 
registration statement. This change will liberalize the filing 
exemption and allow more offerings to be exempt from filing. NASD 
also proposed to rescind this policy in Notice to Members 01-59 
(September 2001).
    \21\ These cases involve allegations of undisclosed underwriting 
compensation, conflicts of interest, failure to file, violations of 
SEC Regulation M, and other charges. In addition, shelf-registered 
equity line financings have raised significant issues regarding 
compliance with NASD Conduct Rules and the federal securities laws.
---------------------------------------------------------------------------

    One commenter suggests that the provision in Forms S-3 and F-3 that 
permits a successor entity to tack on the reporting period of a 
predecessor organization should be incorporated into the Form S-3/F-3 
exception in the Corporate Financing Rule. We agree that a successor 
registrant should be eligible to tack the reporting history of its 
predecessor in order to meet the 36-month reporting history requirement 
in the Corporate Financing Rule. The requirements for tacking are 
narrowly drawn and ensure that the assets, liabilities and public 
information regarding the successor are equivalent to those of other 
issuers whose shelf-registered offerings are eligible for the S-3/F-3 
exemption.
    One commenter recommends that the Rule be amended to provide an 
additional exemption for offerings by issuers filing on Form F-9.\22\ 
The Department rarely, if ever, receives offerings registered on Form 
F-9.\23\ Form F-9 permits registration of non-convertible debt rated 
investment grade by an NRSRO or an ``Approved Rating Organization.'' 
Due to the fact that there is already an exemption in the Corporate 
Financing Rule for offerings of securities rated investment grade and 
the lack of filings on Form F-9, we do not find this request for a 
filing exemption necessary at this time.
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    \22\ Large publicly-traded Canadian issuers registering non-
convertible investment grade securities may use Form F-9.
    \23\ Based on the results of a database search, no recent 
filings on Form F-9 were identified.
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    Schedule B Issuers Exemption: Two commenters recommend that NASD 
amend the proposal to include an exemption from filing for Schedule B 
issuers.\24\ They state that foreign sovereigns offering debt 
securities in the U.S. use Schedule B rather than the Forms F-3 or F-
10. Currently, there is no exemption from NASD filing requirements for 
these offerings. We disagree that foreign governments or their 
political subdivisions that are eligible under SEC rules to use 
Schedule B are not likely to need NASD review of the underwriting terms 
and arrangements with U.S. underwriters. NASD believes such an 
exemption would be inappropriate in light of recent concerns related to 
inequitable practices of members in such offerings. These recent 
investigations call into question the assumptions that commenters have 
made concerning the ability of Schedule B issuers to negotiate on an 
even footing with global investment banking firms to whom the issuer 
depends on for advice and funding. Accordingly, NASD has not included 
such an exemption in the proposed rule change.
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    \24\ Schedule B is the Registration Statement used by foreign 
governments (or political subdivisions of foreign governments) to 
register securities. If the distribution involves a shelf offering, 
language appearing on a Schedule B Registration Statement would be 
similar to the following: ``The securities being registered hereby 
are to be offered on a delayed or continuous basis pursuant to 
Releases No. 33-6248 and 33-6424 under the Securities Act of 1933.'' 
Therefore, a Schedule B filer is not technically making its shelf 
offering pursuant to SEC Rule 415, but through other provisions 
afforded foreign governments.

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[[Page 70745]]

    Multi-Issuer (Trust) Exemptions: One commenter noted an increase in 
the number of ``multi-issuer'' shelf offerings by individual corporate 
groups. The commenter explained that these transactions involve 
multiple offerings of debt and equity securities by a parent or 
operating entity and offerings of trust preferred or pass-through 
securities (``Trust Preferred'') by special purpose vehicles created by 
the parent or operating entity. The commenter suggested that offerings 
of Trust Preferred securities should be exempt from filing when the 
parent or operating entity satisfies the criteria for the S-3/F-3 
exemption or the exemption for issuers with investment grade rated 
debt.
    NASD does not agree that the proposal should be amended to include 
an exemption for Trust Preferred securities due to problems recently 
uncovered in investigations that have involved securities issued from 
trusts formed as special purpose financing vehicles. The Department 
generally reviews Trust Preferred securities as DPP offerings under 
Rule 2810 because of their pass through features. The Department has 
recently encountered regulatory problems with a variety of DPP offering 
structures, terms and compensation arrangements, and does not believe 
it would be appropriate to exempt as a class such offerings from 
review.
    Expedited Reviews: Several commenters suggested that the 15-
business day review period should be shortened in light of the market 
timing and competitive environment associated with shelf offerings. In 
most cases, the Department believes it can complete its review in far 
fewer than 15 days. The Department is generally attentive to requests 
for expedited reviews and prioritizes the review of offerings to 
address the timing concerns of members, and the staff has developed 
procedures for expedited reviews and would give priority to meeting the 
timing needs of members that must receive a no-objections letter prior 
to participating in a shelf offering.
    In addition, Subsequent Member Filings of shelf takedowns that meet 
certain criteria would be eligible for expedited reviews through an 
automated review and clearance (ARC) process. For certain takedown 
transactions, such as those that do not require a qualified independent 
underwriter due to conflicts of interest, members would be eligible for 
an automatic clearance generated by web COBRADesk for any filings that 
follow the Initial Member Filing. The system generated no-objections 
letter would be automatic, if all of the required information is 
provided and there are no review issues such as proposed compensation 
that exceeds the maximum allowable amount. The system would recognize 
when a Subsequent Member Filing satisfies these criteria and the member 
would be displayed in the ``cleared member'' screen automatically. ARC 
would permit filers to expedite their own reviews, as the system would 
issue the no-objections opinion to the member(s) on a 24-hour basis as 
soon as the requirements for clearance are satisfied.
    Notice Filing Requirements: Notice Filings were proposed in Notice 
to Members 01-59 (September, 2001) in order to provide members with 
increased flexibility to quickly take advantage of market 
opportunities. For certain offerings, members could file after they 
participated in a takedown and would not need a no-objections opinion 
prior to such participation in the offering. Many commenters suggested 
that Notice Filings would not result in the efficiencies envisioned by 
the staff. Some commenters suggested that Notice Filings would create 
risks for members as the regulatory review would shift to an 
examination function as opposed to the pre-effective review and comment 
process that is currently in effect. Members expressed concern that the 
filing process and fees did not provide any benefit to members and that 
members would prefer to manage their regulatory risk in a different 
manner. Four commenters contend that since the NASD will not render an 
opinion in connection with these filings, then there would be reason to 
make a filing, as NASD rules generally do not require members to make 
filings for the purpose of confirming their compliance with the rules. 
Commenters also expressed concern that the Notice Filing deadlines 
within 3 and 10 business days of a takedown could cause confusion. To 
address these concerns, the staff has eliminated the Notice Filing 
proposal.
    Coordination of Rule 2710 and Rule 2810: Two commenters were 
concerned that the proposal makes offerings subject to Rule 2810 
(direct participation programs) subject to the provision of the 
Corporate Financing Rule. They recommend that the proposed rule change 
should not be made without further review of each of the provisions of 
the Corporate Financing Rule, as it would apply to offerings subject to 
Rule 2810.
    The proposed amendments only apply to the filing requirements of 
Rule 2810 and conform these requirements and the filing fee 
requirements with the requirements in the Corporate Financing Rule. The 
Department would not review DPPs for compliance with the substantive 
provisions in the Corporate Financing Rule.
    Mark-Up Policy: One commenter opposed amending IM-2440 since the 
amendment targets shelf offerings exempt under the Market Transaction 
Exception. The commenter claims that shelf offerings exempt under MTE 
are only exempt from the filing requirement of Rule 2710, yet still 
subject to the compensation limits of Rule 2710 and Rule 2810.
    The commenter misunderstands the purpose of the exemption. We do 
not anticipate that the Market Transaction Exception will apply to most 
shelf offerings. The exception is designed to be narrow and cover 
securities sold on an agency basis in an ordinary market transaction 
that does not rise to the level of a ``distribution.'' Because such 
trades are not distributions, the generally higher compensation limits 
available under the Corporate Financing Rule for members engaged in a 
distribution would not be available. Instead, the transaction would be 
governed by the NASD's Mark-Up Policy.
    The Acquisition of Unregistered Securities and Rule 144A: Two 
commenters state that, in their experience, securities acquired by 
members and their associated persons from issuers before a shelf 
offering are not compensatory and do not represent an opportunity to 
provide underwriting compensation to NASD members for a subsequent 
offering. The commenters state that members and their affiliates 
frequently hold securities of issuers sold in Rule 144A offerings, 
which may have been acquired as an unsold allotment by a dealer acting 
as an initial purchaser, from other dealers acting as initial 
purchasers, or from third parties in the private secondary resale 
market. These commenters claim that if a member purchased securities of 
the issuer's securities pursuant to Rule 144A, the member could not 
underwrite a shelf tranche within 180-days of the takedown, as the 
acquisitions would make the member ineligible for a Notice Filing. One 
commenter notes that this may have a negative effect upon issuers 
because they may be prohibited from using the investment bankers with 
whom they are most familiar and would create an unlevel playing field 
among members and reduce competitive choices for issuers.
    NASD staff notes that these comments were generated as a result of 
the Notice Filing proposal, which was eliminated. Under the proposed 
rule change, members that anticipate participation in a shelf offering, 
subject to available

[[Page 70746]]

filing exemptions and the Market Transactions Exception, will make 
either an initial or a subsequent filing. Unregistered securities that 
constitute items of value that were acquired by such members, or their 
affiliates and associated persons within 180 days of the filing would 
be reviewed by NASD and would only be deemed underwriting compensation 
if appropriate, and subjected to the applicable compensation 
limitations and disclosure requirements of the Corporate Financing 
Rules.
    Selected Dealers: One commenter suggested that compensation to 
selected dealers is not relevant to underwriting compensation. Another 
commenter wrote that selected dealers are not underwriters for purposes 
of the Securities Act.\25\ These commenters claim that selected dealers 
should be excepted from the information required by the NASD concerning 
participating members, and unregistered securities and items of value 
received by selected dealers should not be included in the calculation 
of underwriting compensation. They also claim that selected dealers 
should not have an obligation to make filings under the Corporate 
Financing Rule.\26\
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    \25\ Section 2(a)(11) of the Securities Act provide that the 
term underwriter ``shall not include a person whose interest is 
limited to a commission from an underwriter or dealer not in excess 
of the usual and customary distributors' or sellers' commission.''
    \26\ Selected Dealers are typically covered by the filing made 
by a managing underwriter.
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    The basic premise for including selected dealers' compensation as 
underwriting compensation is that such members are participating in the 
distribution of an offering. The definition of ``participation in a 
public offering'' in the Corporate Financing Rules, includes 
participating on ``* * * an underwritten, non-underwritten, or any 
other basis * * *'' and therefore includes selected dealers. Moreover, 
the rule specifically requires that selected dealer agreements be filed 
for review. The staff has reviewed offerings in which a selected dealer 
was allocated a substantial portion of the underwritten securities due 
to its relationship with the issuer and the managing underwriter. NASD 
Notice to Members 88-101 states that the ``participation of a member in 
any offering of securities distributed pursuant to Rule 415 constitutes 
participation in a public offering.'' Excluding selected dealers would 
create loopholes in the treatment of underwriting compensation and 
conflicts of interest. NASD views selected dealers as members 
participating in public offerings.

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. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#2e5c5b424b034d4143434b405a5d6e5d4b4d00494158"><span class="__cf_email__" data-cfemail="92e0e7fef7bff1fdfffff7fce6e1d2e1f7f1bcf5fde4">[email protected]</span></a>. Please include 
File Number SR-NASD-2004-022 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File No. SR-NASD-2004-022. This 
file number should be included on the subject line if e-mail is used. 
To help us process and review comments more efficiently, comments 
should be sent in hardcopy or by e-mail but not by both methods. The 
Commission will post all comments on the Commission's Internet Web site 
(http://www.sec.gov/rules/sro.shtml). 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 NASD. All submissions 
should refer to file number SR-NASD-2004-022 and should be submitted by 
January 21, 2005.\27\
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    \27\ NASD has consented to an extension of time for the 
Commission to take action on this proposed rule change.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-26809 Filed 12-6-04; 8:45 am]
BILLING CODE 8010-01-P


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