77804 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 

8 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b-4.

Paper Comments 

• 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 

Number SR–DTC–2004–11. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. 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 

Section, 450 Fifth Street, NW., 

Washington, DC 20549. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of DTC and on DTC’s Web site at 

http://www.dtc.org. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–DTC–

2004–11 and should be submitted on or 

before January 18, 2005.

For the Commission by the Division of 

Market Regulation, pursuant to delegated 

authority.8

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. E4–3827 Filed 12–27–04; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50896; File Nos. SR–NYSE–

2004–12; SR–NASD–2003–140] 

Self-Regulatory Organizations; Notice 

of Filing of Proposed Rule Changes by 

the New York Stock Exchange, Inc. and 

the National Association of Securities 

Dealers, Inc. Relating to the Prohibition 

of Certain Abuses in the Allocation and 

Distribution of Shares in Initial Public 

Offerings (‘‘IPOs’’) 

December 20, 2004. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’)1 and Rule 19b-4 

thereunder,2 notice is hereby given that 

on September 10, 2004, the New York 

Stock Exchange, Inc. (‘‘NYSE’’ or 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission (‘‘SEC’’ or 

‘‘Commission’’) Amendment No. 1 to its 

proposed rule change (‘‘NYSE 

Amendment No. 1’’), which it originally 

filed on February 25, 2004.

On August 4, 2004, the National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’) filed with the Commission 

Amendment No. 2 to its proposed rule 

change (‘‘NASD Amendment No. 2’’), 

which it originally filed on September 

15, 2003, and subsequently amended on 

December 9, 2003. 

NYSE Amendment No. 1 and NASD 

Amendment No. 2 are described in 

Items I, II, and III below, which Items 

have been prepared by the respective 

self-regulatory organizations (‘‘SROs’’). 

The Commission is publishing this 

notice to solicit comments on the 

proposed rule changes as amended from 

interested persons. 

I. Self-Regulatory Organizations’

Statements of the Terms of Substance of 

the Proposed Rule Changes 

The NYSE is filing with the 

Commission proposed new NYSE Rule 

470 (IPO Allocations and Distributions), 

governing the allocation and 

distribution of initial public offerings 

(‘‘IPOs’’). 

NASD is proposing new NASD Rule 

2712 to further and more specifically 

prohibit certain abuses in the allocation 

and distribution of shares in IPOs. 

Below is the text of the proposed rule 

changes. Proposed new language is 

underlined. 

A. NYSE’s Proposed Rule Text 

Rule 470 IPO Allocations and 

Distributions

Prohibition on Abusive IPO Allocation 

Practices

(A) Quid Pro Quo Allocations

No member, member organization, or 

person associated with a member or 

member organization may offer or 

threaten to withhold shares it allocates 

in an initial public offering (‘‘IPO’’) as 

consideration or inducement for the 

receipt of compensation that is 

excessive in relation to the services 

provided by the member or member 

organization.

(B) Spinning

No member, member organization, or 

person associated with a member or 

member organization may allocate IPO 

shares to an executive officer or director 

of a company, including to a person 

materially supported by such executive 

officer or director:

(1) if the member or member 

organization has received compensation 

from the company for investment 

banking services in the past 12 months;

(2) if the member or member 

organization expects to receive or 

intends to seek investment banking 

business from the company in the next 

6 months; or

(3) on the express or implied 

condition that such executive officer or 

director, on behalf of the company, 

direct future investment banking 

business to the member or member 

organization.

For purposes of Rule 470(B)(2), a 

member or member organization that 

allocates IPO shares to an executive 

officer or director of a company, or a 

person materially supported by such 

officer or director, from which it 

subsequently receives investment 

banking business within the next 6 

months, will be presumed to have made 

the allocation with the expectation or 

intent to receive such business. A 

member or member organization, 

however, may rebut this presumption by 

demonstrating that the allocation of IPO 

shares was not made with the 

expectation or intent to receive 

investment banking business.

(C) Policies Concerning Flipping

(1) No member, member organization 

or person associated with a member or 

member organization may directly or 

indirectly recoup, or attempt to recoup, 

any portion of a commission or credit 

paid or awarded to an associated person 

for selling shares in an IPO that are 

subsequently flipped by a customer 

unless the managing underwriter has 

assessed a penalty bid, as defined in 

Rule 100 of Regulation M under the 

Securities Exchange Act of 1934 (the 

‘‘Exchange Act’’), on the entire 

syndicate.

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 77805

(2) In addition to its obligation to 

maintain records relating to penalty 

bids under Rule 17a–2(c)(1) of the 

Exchange Act, a member or member 

organization shall promptly record and 

maintain information regarding any 

penalties or disincentives assessed on 

its associated persons in connection 

with a penalty bid.

IPO Pricing and Trading Practices

(D) IPO Pricing

No member or member organization 

may serve as a book-running lead 

manager of an IPO, unless the IPO 

meets all of the following conditions:

(1) The book-running lead manager 

will provide the issuer’s pricing 

committee (or, if the issuer has no 

pricing committee, its board of 

directors) or a similar managing group 

authorized to oversee and address the 

pricing and allocation of such IPO 

shares:

(a) a regular report of indications of 

interest, including the names of 

interested institutional investors and the 

number of shares indicated by each, as 

reflected in the book-running lead 

manager’s book of potential 

institutional orders, and a report of 

aggregate demand from retail investors;

(b) after the settlement date of the 

IPO, a report of the final allocation of 

shares to institutional investors as 

reflected in the books and records of the 

book-running lead manager, including 

the names of purchasers and the 

number of shares purchased by each, 

and aggregate sales to retail investors.

(2) Lock-Up Agreements. Any lock-up 

agreement or other restriction on the 

transfer of the issuer’s shares by officers 

and directors of the issuer shall provide 

that:

(a) such agreements will apply to their 

issuer-directed shares;

(b) at least two business days before 

the release or waiver of any lock-up or 

other restriction on the transfer of the 

issuer’s shares, the book-running lead 

manager will notify the issuer of the 

impending release or waiver and 

announce the impending release or 

waiver through a major news service.

(3) Agreement Among Underwriters. 

The agreement between the bookrunning lead manager and other 

syndicate members provides that with 

respect to any shares returned by a 

purchaser to a syndicate member after 

secondary market trading commences:

(a) the returned shares will be used to 

offset any existing syndicate short 

position; or

(b) if no syndicate short position 

exists, or if all existing syndicate short 

positions have been covered, the 

member or member organization must 

offer returned shares at the public 

offering price to customers’ unfilled 

orders pursuant to a random allocation 

methodology.

(E) Market Orders

No member or member organization 

may accept a market order for the 

purchase of IPO shares during the first 

day that IPO shares commence trading 

on the secondary market.

(F) Definitions

For purposes of this Rule, the 

following terms shall have the meanings 

stated below.

(1) The terms ‘‘person associated with 

a member or member organization’’ and 

‘‘associated person of a member or 

member organization’’ shall have the 

same meaning as defined under Section 

3(a)(21) of the Exchange Act.

(2) The term ‘‘initial public offering’’

is defined in Rule 472.100.

(3) ‘‘Material support’’ means directly 

or indirectly providing more than 25% 

of a person’s income in the prior 

calendar year. Persons living in the 

same household are deemed to be 

providing each other with material 

support.

(4) The term ‘‘investment banking 

services’’ is defined in Rule 472.20.

(5) ‘‘Flipped’’ means the initial sale of 

IPO shares purchased in an offering 

within 30 days following the offering 

date, as defined in Rule 472.120.

(6) ‘‘Penalty bid,’’ as defined in Rule 

100 of Regulation M, ‘‘means an 

arrangement that permits the managing 

underwriter to reclaim a selling 

concession from a syndicate member in 

connection with an offering when the 

securities originally sold by the 

syndicate member are purchased in 

syndicate covering transactions.’’

B. NASD’s Proposed Rule Text 

2712. IPO Allocations and 

Distributions

(a) Quid Pro Quo Allocations

No member or person associated with 

a member may offer or threaten to 

withhold shares it allocates in an initial 

public offering (‘‘IPO’’) as consideration 

or inducement for the receipt of 

compensation that is excessive in 

relation to the services provided by the 

member.

(b) Spinning

No member or person associated with 

a member may allocate IPO shares to an 

executive officer or director of a 

company, or to a person materially 

supported by such executive officer or 

director:

(1) if the member has received 

compensation from the company for 

investment banking services in the past 

12 months;

(2) if the member expects to receive or 

intends to seek investment banking 

business from the company in the next 

6 months; or

(3) on the express or implied 

condition that such executive officer or 

director, on behalf of the company, 

direct future investment banking 

business to the member.

For purposes of paragraph (b)(2), a 

member that allocates IPO shares to an 

executive officer or director of a 

company, or a person materially 

supported by such officer or director, 

from which it receives investment 

banking business in the next 6 months 

will be presumed to have made the 

allocation with the expectation or intent 

to receive such business. A member, 

however, may rebut this presumption by 

demonstrating that the allocation of IPO 

shares was not made with the 

expectation or intent to receive 

investment banking business.

(c) Policies Concerning Flipping

(1) No member or person associated 

with a member may directly or 

indirectly recoup, or attempt to recoup, 

any portion of a commission or credit 

paid or awarded to an associated person 

for selling shares in an IPO that are 

subsequently flipped by a customer, 

unless the managing underwriter has 

assessed a penalty bid on the entire 

syndicate.

(2) In addition to any obligation to 

maintain records relating to penalty 

bids under SEC Rule 17a–2(c)(1), a 

member shall promptly record and 

maintain information regarding any 

penalties or disincentives assessed on 

its associated persons in connection 

with a penalty bid.

(d) Definitions

For purposes of this Rule, the 

following terms shall have the meanings 

stated below.

(1) ‘‘Flipped’’ means the initial sale of 

IPO shares purchased in an offering 

within 30 days following the offering 

date of such offering.

(2) ‘‘Penalty bid’’ means an 

arrangement that permits the managing 

underwriter to reclaim a selling 

concession from a syndicate member in 

connection with an offering when the 

securities originally sold by the 

syndicate member are purchased in 

syndicate covering transactions.

(3) ‘‘Material support’’ means directly 

or indirectly providing more than 25% 

of a person’s income in the prior 

calendar year. Persons living in the 

same household are deemed to be 

providing each other with material 

support.

(e) IPO Pricing and Trading Practices

In an equity IPO:

(1) Reports of Indications of Interest 

and Final Allocations. The bookrunning lead manager must provide to 

77806 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 

3The Commission notes that the Exchange 

intends for the text contained in Amendment No. 

1 to be included in its statement of the purpose for 

the proposed rule change. Telephone conversation 

between William Jannace, attorney, NYSE, Douglas 

Preston, attorney, NYSE, Joan Collopy, special 

counsel, Division of Market Regulation, 

Commission, and Bradley Owens, attorney, 

Division of Market Regulation, Commission 

(December 10, 2004).

4NYSE/NASD IPO Advisory Committee, Report 

and Recommendations, (May 2003), which is 

available at http://www.nyse.com/pdfs/

iporeport.pdf (‘‘IPO Report’’).

5See IPO Report, page 3.

the issuer’s pricing committee (or, if the 

issuer has no pricing committee, its 

board of directors):

(A) a regular report of indications of 

interest, including the names of 

interested institutional investors and the 

number of shares indicated by each, as 

reflected in the book-running lead 

manager’s book of potential 

institutional orders, and a report of 

aggregate demand from retail investors;

(B) after the settlement date of the 

IPO, a report of the final allocation of 

shares to institutional investors as 

reflected in the books and records of the 

book-running lead manager including 

the names of purchasers and the 

number of shares purchased by each, 

and aggregate sales to retail investors;

(2) Lock-Up Agreements. Any lock-up 

agreement or other restriction on the 

transfer of the issuer’s shares by officers 

and directors of the issuer shall provide 

that:

(A) Any lock-up agreement or other 

restriction on the transfer of the issuer’s 

shares by officers and directors of the 

issuer shall provide that such 

restrictions will apply to their issuerdirected shares; and

(B) At least two business days before 

the release or waiver of any lock-up or 

other restriction on the transfer of the 

issuer’s shares, the book-running lead 

manager will notify the issuer of the 

impending release or waiver and 

announce the impending release or 

waiver through a major news service;

(3) Agreement Among Underwriters. 

The agreement between the bookrunning lead manager and other 

syndicate members must require that 

any shares returned by a purchaser to a 

syndicate member after secondary 

market trading commences be used to 

(a) offset the existing syndicate short 

position or (b) if no syndicate short 

position exists, the member must offer 

returned shares at the public offering 

price to unfilled customers’ orders 

pursuant to a random allocation 

methodology.

(4) Market Orders. No member may 

accept a market order for the purchase 

of IPO shares during the first day that 

IPO shares commence trading on the 

secondary market.

II. Self-Regulatory Organizations’

Statements of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Changes 

In their filings with the Commission, 

the NYSE and NASD included 

statements concerning the purpose of, 

and statutory basis for, the proposed 

rule changes.3 The text of these 

statements may be examined at the 

places specified in Item IV below. The 

NYSE and NASD have prepared 

summaries, set forth in Sections (A), (B), 

and (C) below, of the most significant 

aspects of such statements.

(A) Self-Regulatory Organizations’

Statements of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Changes 

1. NYSE’s Purpose 

Proposed NYSE Rule 470 (IPO 

Allocations and Distributions) would 

govern the allocation and distribution of 

IPOs by members and member 

organizations. The Rule prohibits 

certain inappropriate conduct by 

members and member organizations in 

allocating and distributing IPOs and 

will provide the investing public with a 

greater degree of confidence in the IPO 

process and the capital markets as a 

whole. 

Background 

According to the NYSE, a series of 

regulatory investigations identified 

certain types of questionable conduct by 

securities underwriters and others 

involved in the IPO process. Examples 

of such conduct noted by the NYSE 

included, among others: (1) ‘‘spinning,’’

whereby underwriters allocated hot IPO 

shares to executives of prospective 

investment banking clients in return for 

future investment banking business; (2) 

unlawful ‘‘quid pro quo’’ arrangements, 

whereby underwriters allocated IPO 

shares as consideration or inducement 

for the receipt of compensation that is 

excessive in relation to the services 

provided by the member or member 

organization; (3) the inequitable 

imposition of penalty bids (reclaiming 

of selling concessions) upon retail 

brokers, but not brokers servicing 

institutional clients, whose clients 

immediately sold (flipped) IPO shares in 

the aftermarket; and (4) allocating IPO 

shares based on agreements to pay 

excessive commissions for unrelated 

securities transactions. 

In August 2002, the NYSE and NASD, 

at the request of the SEC, established an 

IPO Advisory Committee (the 

‘‘Committee’’) to address the practices 

noted above, review the IPO process as 

a whole, and make recommendations to 

address these issues and improve the 

process in general. The work of the IPO 

Advisory Committee resulted in the 

issuance of a report in May 2003.4

Recognizing the importance of IPOs to 

the vitality of our capital markets, the 

Committee solicited and/or received 

input from all constituencies involved 

in this process, including investment 

bankers, venture capitalists, individual 

and institutional investors, and listed 

companies. The Committee also 

received input from various trade 

organizations (i.e., Association of 

Publicly Traded Companies), and from 

representatives from academia as well. 

The Committee proposed 20 

recommendations that address four 

major subject areas: (1) The IPO process 

must promote transparency in pricing 

and avoid aftermarket distortions; (2) 

Abusive allocation practices must be 

eliminated; (3) Regulators must improve 

the flow of, and access to, information 

regarding IPOs; and (4) Regulators must 

encourage underwriters to maintain the 

highest possible standards, establish 

issuer education programs regarding the 

IPO process, and promote investor 

education about the advantages and 

risks of IPO investing.5

In terms of rulemaking, the 

recommendations cover three areas: (1) 

Recommendations requiring SEC 

Rulemaking; (2) Recommendations 

requiring SRO rulemaking; and (3) 

Recommendations that may require 

changes to marketplace listing 

standards. 

The Exchange is proposing NYSE 

Rule 470 to address the following 

recommendations in the IPO Report: 

(a) Recommendations 2 and 14/

Proposed NYSE Rule 470(D)(1)—

Require the managing underwriter to 

disclose indications of interest and final 

allocations to an issuer’s pricing 

committee or, if the issuer has no 

pricing committee, to its board of 

directors. 

(b) Recommendation 4/Proposed 

NYSE Rule 470(E)—Prohibit the 

acceptance of market orders to purchase 

IPO shares in the aftermarket for one 

trading day following an IPO. 

(c) Recommendation 5/Proposed 

NYSE Rule 470(C)—Prohibit the 

inequitable imposition of ‘‘flipping’’

penalties (penalty bids) on associated 

persons whose customers flip IPO 

shares. 

(d) Recommendation 6/Proposed 

NYSE Rule 470(D)(3)—Establish 

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 77807

6 17 CFR 242.104.

7 17 CFR 242.100.

procedures designed to prevent reneged 

IPO allocations from being used to 

benefit favored clients of the 

underwriter. 

(e) Recommendation 9/Proposed 

NYSE Rule 470(B)—Prohibit the 

allocation of IPO shares (1) to executive 

officers and directors (and their 

household members) of companies that 

have an investment banking 

relationship with the underwriter, or (2) 

as a ‘‘quid pro quo’’ for investment 

banking business. 

(f) Recommendation 11/Proposed 

NYSE Rule 470(A)—Prohibit the 

allocation of IPO shares as consideration 

or inducement for the payment of 

excessive compensation for other 

services provided by the underwriter. 

(g) Recommendation 17/Proposed 

NYSE Rule 470(D)(2)(a)—Require that 

lock-up agreements apply to shares 

owned by the issuer’s officers and 

directors as well as to ‘‘issuer-directed’’

shares.

(h) Recommendation 17/Proposed 

NYSE Rule 470(D)(2)(b)—Impose new 

notification requirements when 

underwriters waive lock-ups. 

According to the NYSE, some of the 

Committee’s other recommendations 

will not require rulemaking. In this 

regard, the Committee recommended 

additional requirements for enhanced 

periodic internal review by 

underwriters of their IPO supervisory 

procedures and a heightened focus on 

the IPO process by the SROs. The 

Exchange will address these 

recommendations through its regulatory 

examinations of members and member 

organizations. 

Although the Exchange is proposing 

new NYSE Rule 470 regarding IPO 

allocations and distributions, the federal 

securities laws and the Exchange rules 

already prohibit certain IPO allocation 

and distribution abuses. According to 

the Exchange, NYSE Rule 470 is 

proposed to address certain of the issues 

raised in the IPO Report and is intended 

to complement existing federal 

securities laws and Exchange Rules, 

which will continue to apply after the 

proposed rule change is effective. 

Discussion of Proposed Rule Provisions 

According to the NYSE, the IPO 

Report noted that certain allocation 

practices raise an appearance of 

impropriety, and that rules should be 

adopted to address this issue. 

Accordingly, the Exchange is proposing 

a rule to make unlawful the practice of 

‘‘spinning’’ and other ‘‘quid pro quos’’

by members and member organizations 

as inducement for the receipt of 

investment banking business. 

Proposed NYSE Rule 470(A)—Quid Pro 

Quo Allocations 

According to the NYSE, proposed 

NYSE Rule 470(A) would prohibit 

members and member organizations 

from allocating IPO shares as 

consideration or inducement for the 

receipt of compensation that is 

excessive in relation to the services 

provided by the member or member 

organizations. The NYSE believes that 

while the federal securities laws and 

Exchange rules generally prohibit 

abusive IPO allocation and distribution 

arrangements, such as where 

underwriters allocate IPO shares based 

on a potential investor’s agreement to 

pay excessive commissions on trades of 

unrelated securities or based on the 

recipient’s agreement to ‘‘kick back’’ to 

the underwriter, either through excess 

commissions or otherwise, a portion of 

flipping profits, the proposed rule 

would specifically prohibit such 

conduct. According to the NYSE, the 

proposed prohibition, however, is not 

intended to interfere with a member’s or 

member organization’s business 

relationships with its customers nor 

would it prohibit legitimate allocations 

of such IPO shares to customers of the 

member or member organization, even 

when a customer has retained the 

member or member organization for 

services. 

Proposed NYSE Rule 470(B)—Spinning 

According to the NYSE, as originally 

proposed, NYSE Rule 470(B) would 

prohibit the awarding of IPO shares to 

executive officers and directors and 

their household members of issuers that 

have, or will have, an investment 

banking relationship with the member 

or member organization on the 

condition that such officers and 

directors, on behalf of the issuer, direct 

future investment banking business to 

the member or member organization 

(commonly referred to as ‘‘spinning’’). 

In Amendment No. 1, the Exchange 

substituted the term ‘‘company’’ for 

‘‘issuer,’’ as many of the practices 

addressed in the proposed rule may 

occur prior to a company becoming an 

issuer. Further, the prohibitions against 

such allocations would also extend to 

affiliates of the company. 

In Amendment No. 1, the Exchange 

amended its original prohibition 

precluding allocations to executive 

officers or directors of a company to 

include persons ‘‘materially supported’’

by such officers or directors if the 

member or member organization expects 

to receive or intends to seek investment 

banking business from the company in 

the next six months. Previously, the 

proposed rule change applied to 

household members of such persons 

and only looked forward three months. 

In addition, Amendment No. 1 adds 

the presumption that if a firm allocates 

IPO shares to an executive officer or 

director of a company and it 

subsequently receives investment 

banking business from that company, 

then the IPO allocations were made 

with the expectation or intent to receive 

such business. The proposed rule states 

that a member or member organization 

may rebut this presumption. According 

to the Exchange, such evidence could 

include procedures that ensure 

investment banking personnel involved 

in allocations do not have any 

information about the beneficial owners 

of retail accounts that received 

allocations. 

In Amendment No. 1, the Exchange is 

proposing to define ‘‘material support’’

to mean ‘‘* * * directly or indirectly, 

providing more than 25% of a person’s 

income in the prior calendar year. 

Persons living in the same household 

are deemed to be providing each other 

with material support.’’

Proposed NYSE Rule 470(C)—Policies 

Concerning Flipping 

According to the NYSE, proposed 

NYSE Rule 470(C) would prohibit the 

inequitable imposition of a flipping 

penalty (penalty bids) on associated 

persons whose customers flipped IPO 

shares unless such penalty is imposed 

on the entire underwriting syndicate. In 

Amendment No. 1, the Exchange 

deleted the term ‘‘underwriting’’ from 

the term ‘‘underwriting syndicate’’ to 

ensure that penalty bids for flipping be 

assessed on the entire syndicate, not just 

the underwriting syndicate (e.g., the 

selling group). 

Rule 104 of Regulation M under the 

Exchange Act,6 permits underwriters to 

impose penalty bids (as defined in Rule 

100 of Regulation M) 7 on syndicate 

members. ‘‘Penalty bid,’’ as defined in 

Rule 100 of Regulation M, means ‘‘an 

arrangement that permits the managing 

underwriter to reclaim a selling 

concession from a syndicate member in 

connection with an offering when the 

securities sold by the syndicate member 

are purchased in syndicate 

transactions.’’ The purpose of imposing 

penalty bids is to promote a stable 

aftermarket, whereby purchasers of the 

offering remain long-term shareholders 

of the securities and not merely 

speculators seeking to lock-in instant 

profits, as was prevalent during the 

77808 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 

8 17 CFR 240.17a–2(c)(1).

9See IPO Report, page 13.

10Recommendation 17 of the IPO Report also 

requires that issuers file a Form 8–K, prior to the 

time on insider makes sales pursuant to the 

expiration or waiver of the lock-up. According to 

the NYSE, this would require SEC rulemaking.

recent stock market bubble of the late 

1990s.

According to the NYSE, regulatory 

investigation revealed instances where, 

while penalty bids where not imposed 

upon syndicate members, such members 

themselves selectively imposed such 

penalties upon certain of their brokers 

whose customers (generally retail) 

flipped IPO shares in the immediate 

aftermarket. Similar penalties were not 

imposed upon brokers whose 

institutional type investors engaged in 

the same trading patterns. Selective 

imposition of penalty bids upon retail 

brokers resulted in these brokers 

discouraging their retail customers from 

selling immediately in the aftermarket, 

while implicitly permitting 

institutional-type investors to sell 

during this same time period. 

According to the NYSE, proposed 

NYSE Rule 470(C)(1) addresses this 

inequity by prohibiting the imposition 

of penalty bids upon an associated 

person of a member or member 

organization, unless the penalty has 

been imposed on the entire syndicate. 

As proposed, NYSE Rule 470(C)(1) 

would not affect the applicability of 

Rule 104 of Regulation M as it pertains 

to penalty bids. 

In addition, as proposed, members 

and member organizations would be 

required to maintain records of penalty 

bids in accordance with Rule 17a–

2(C)(1) 8 under the Exchange Act. Rule 

17a-2(C)(1) imposes recordkeeping 

requirements on managers or syndicates 

in connection with syndicate covering 

transactions and the imposition of 

penalty bids. In Amendment No. 1, the 

Exchange is proposing that all members 

and member organizations, not solely 

managers as 17(a)–2(c)(1) prescribes, be 

subject to recordkeeping requirements 

for any penalties or disincentives 

assessed on their associated persons in 

connection with a penalty bid.

Proposed NYSE Rule 470(D)—IPO 

Pricing and Trading Practices 

Disclosure of Indications of Interest and 

Final Allocations 

As originally proposed, NYSE Rule 

470(D)(1) requires book-running lead 

managers to disclose in a regular report 

indications of interest and final 

allocations of an IPO to an issuer’s 

pricing committee or, if the issuer has 

no pricing committee, to its board of 

directors or a managing group 

authorized to oversee this process. In 

Amendment No. 1, the Exchange 

amended the proposed rule to substitute 

‘‘book-running lead manager’’ for 

‘‘managing underwriter,’’ to reflect 

market practice whereby the bookrunning lead manager maintains this 

information. 

The Exchange believes that disclosure 

of each retail customer’s indications of 

interest (and subsequent allocations) 

would be of limited benefit to issuers 

and their pricing committees. According 

to the NYSE, the underlying purpose of 

this proposal is to ensure that the issuer 

or its pricing committee has a clear 

picture of the demand for its securities. 

Thus, the NYSE believes that 

information about each retail investor 

would generally not be helpful. 

Accordingly, the Exchange is amending 

its proposed rule to require that the 

book-running lead manager provide a 

‘‘regular report’’ of indications of 

interest for its institutional book, 

including names of interested 

institutional investors and the number 

of shares indicated by each, and to 

reflect retail demand in aggregate terms 

only.

The Exchange believes that a regular 

report of institutional investors’

indications of interest should be made 

as often as appropriate, including when 

a material change occurs, or in 

connection with certain meetings with 

the issuer or its pricing committee, and 

as frequently as requested by the issuer 

or its pricing committee. The Exchange 

is aware that book-running lead 

managers, and to a certain extent 

syndicate managers, have regular 

meetings to discuss the book-building 

process, including indications of 

interest from institutional investors. 

Also, the book-running lead manager 

usually has frequent and daily 

discussions with issuers about the level 

of indications of interest. The proposed 

rule change would conform to these 

practices. 

According to the NYSE, the pricing of 

an IPO is determined, in part, by 

investor demand. Investor demand is 

measured by preliminary indications of 

interest underwriters receive up to the 

time an offering is declared effective by 

the Commission. In requiring disclosure 

of such information, the Exchange will 

promote greater transparency in IPO 

pricing, a stated goal of the IPO Report. 

In Amendment No. 1, the Exchange 

amended proposed Rule 470 (D)(1)(b) to 

require the book-running lead manager 

to provide the report on final allocations 

within a reasonable time after 

‘‘settlement date’’ rather than after 

‘‘closing date.’’ The settlement date and 

closing date may, at times, be the same 

date; but the term ‘‘settlement date’’ is 

more precisely understood as the date 

on which the issuer transfers its shares 

in return for offering proceeds from the 

syndicate. 

Limitations on ‘‘Friends and Family’’

Programs 

The IPO Report recommends 

promoting greater transparency with 

regard to ‘‘issuer-directed’’ allocations 

such as ‘‘friends and family’’ programs. 

‘‘Friends and family’’ programs are 

‘‘issuer-directed allocations of a portion 

of an offering used to permit company 

employees to invest in their employer at 

the IPO price, or to permit strategic 

business partners to have a small 

investment in the issuer.’’9 According to 

the NYSE, lock-ups are essential, in the 

early stages of the life of a company 

going public, for maintaining a stable 

aftermarket following an IPO. Subjecting 

a greater number of shares to such 

agreements will help foster this stable 

aftermarket by preventing shares, not 

ordinarily subject to lock-ups, from 

being sold in the immediate aftermarket.

Requirements Concerning Lock-up 

Exemptions 

As proposed, NYSE Rule 470(D)(2)(a) 

would require that lock-up agreements 

also apply to officers’ and directors’

‘‘issuer-directed’’ shares, in addition to 

their other shares that are subject to 

such agreements. Proposed NYSE Rule 

470(D)(2)(b) would require prior 

notification when lock-ups expire or are 

waived. Further, proposed NYSE Rule 

470(D)(2)(b) would require 2-day prior 

notification to the issuer by a bookrunning lead manager through a major 

news service. 10 The NYSE believes this 

notification requirement will benefit an 

issuer’s shareholders and the 

marketplace in that it will ensure that 

they are aware of this prior information 

to and not after the sale by directors and 

officers of the issuer.

In Amendment No. 1, the Exchange 

amended proposed NYSE Rule 470 

(D)(2) to clarify that the required public 

announcement by the book-running lead 

manager must be made at least two days 

before the release or waiver of any lockup requirement through a major news 

service. According to the NYSE, the IPO 

Advisory Committee concluded that 

investors reasonably expect that the 

issuer’s directors, officers and large preIPO shareholders who agree to ‘‘lockup’’ their shares will be bound by those 

agreements for the stated period. As a 

result, the proposed rule provides that 

the book-running lead manager should 

announce any release or waiver of a 

lock-up agreement at least two business 

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 77809

11See also, NYSE Listed Company Manual, 

Section 202.06 (Procedure for Public Release of 

Information).

12See NYSE Rule 472(f)(4). 13See IPO Report, pages 6 and 7.

14See IPO Report, page 6.

15See Securities Exchange Act Release No. 48252 

(July 29, 2003), 68 FR 45875 (August 4, 2003), (SR–

NYSE 2002–49).

16See Litigation Release No. 18438 (October 31, 

2003).

17See Securities Exchange Act Release No. 48745 

(November 4, 2003) (SR–NYSE–2002–33).

18 15 U.S.C. 78f(b)(5).

days before through a major news 

service. The Exchange believes it is 

important to make clear that this 

notification requirement applies to a 

release or waiver of lock-ups by the 

issuer and any selling shareholder. 

The Exchange does not believe that 

placing such notice on the managing 

underwriter(s) Web site will provide for 

sufficient public dissemination of such 

information. Often, a member or 

member organization Websites contain 

large amounts of information and may 

provide challenges to locating specific 

information. As such, the Exchange 

believes that notice of the release or 

waiver of any lock-up or other 

restriction should be disseminated 

through a broad non-exclusionary 

distribution medium to the public, such 

as through major news services. 

Accordingly, the Exchange amended its 

Filing to limit dissemination to this 

prescribed manner and not permit 

dissemination through a Web site, as 

originally proposed in their Filing. 

According to the NYSE, such a notice 

must be released by the fastest available 

means. The fastest available means may 

vary in individual cases and according 

to the time of day. To ensure adequate 

coverage, releases should be marked 

‘‘For Immediate Release’’ and should be 

given to, for example, Dow Jones & 

Company, Inc., Reuters Economic 

Services and Bloomberg Business News. 

The book-running lead manager is also 

encouraged to promptly distribute such 

notices to, for example, the Associated 

Press and United Press International, as 

well as to newspapers in New York City 

and in cities where the issuer is 

headquartered or has other major 

facilities. According to the NYSE, every 

notice should include the name and 

telephone number of an official at the 

book-running lead manager who will be 

available if a newspaper or news wire 

service desires to confirm or clarify the 

notice.11

The NYSE believes proposed NYSE 

Rule 470 (D)(2)(b) will help facilitate 

members’ and member organizations’

compliance with recently enacted 

amendments to NYSE Rule 472,12 which 

prohibits managers and co-managers of 

a securities offering from publishing 

research or offering opinions during a 

public appearance on an issuers’

securities within 15 days prior to or 

after the expiration or waiver of a lockup agreement. According to the NYSE, 

requiring prior public notification 

should prevent the inadvertent issuance 

of reports, and/or the making of public 

appearances through ignorance of the 

expiration, or waiver of such 

agreements.

Returned Shares 

The IPO Report recommended the 

establishment of clear parameters for 

underwriters’ sales of returned shares 

after secondary market trading has 

commenced. It noted that IPO shares are 

sometimes returned to the underwriter 

after secondary trading commences as a 

result of either: (1) mistaken allocations; 

or (2) incomplete information or other 

problems relating to the delivery of 

shares and settlement of trades. In 

instances where the IPO shares trade at 

an immediate aftermarket premium, the 

underwriter has the ability to allocate 

any returned shares to favored 

customers at the IPO price, guaranteeing 

such customers an immediate locked-in 

profit.13

In response to this practice, proposed 

NYSE Rule 470(D)(3) would require all 

syndicate members to prioritize the 

treatment of returned shares in the 

following order: (1) use the returned 

shares to offset any existing syndicate 

short position; or (2) if no syndicate 

short position exists, or if all existing 

syndicate short positions have been 

covered, offer those shares to customers’

unfilled orders at the public offering 

price pursuant to a random allocation 

methodology.

While the proposed rule change does 

not specify a particular methodology, 

the Exchange expects that members and 

member organizations will develop 

systems to randomly allocate in an 

objective non-discriminatory manner. 

According to the Exchange, member and 

member organizations may use the 

allocation of option exercise notices as 

an example when designing such a 

system. According to the Exchange, in 

requiring the use of a random allocation 

methodology, members and member 

organizations will be limited in their 

ability to benefit certain preferred 

customers by selecting a particular 

customer or group of customers to 

receive a guaranteed profit. 

Limitation on Market Orders for One 

Day Following an IPO 

Proposed NYSE Rule 470(E) would 

prohibit the acceptance of market orders 

to purchase IPO shares in the 

aftermarket for one trading day 

following an IPO. The IPO Report noted 

that IPOs are ‘‘inherently more volatile 

than stocks with a public trading 

history,’’ and that the placement of 

market orders by individuals in the 

immediate aftermarket may not ‘‘reflect 

their true investment decisions nor their 

reasonable expectations.’’ 14 Therefore, 

the Committee reasoned that prohibiting 

the acceptance of market orders 

immediately following an IPO would 

allow the market to develop more 

trading information and thus make the 

placement of such orders more 

appropriate for investors. In addition, 

institutional investors generally rely on 

limit orders for IPOs in the aftermarket. 

In this regard, the Exchange does not 

believe that the prohibitions on the 

placement of market orders for IPOs on 

the first trading day will have an 

appreciable effect on liquidity and 

market efficiency.

The NASD has filed proposed 

amendments with the SEC to address 

some of the recommendations noted 

above and has sought membership 

comment on additional proposed 

amendments. The staffs of both the 

Exchange and NASD are coordinating 

their efforts in an attempt to promulgate 

consistent rules. 

The Exchange believes that enactment 

of the proposed Rule will complement 

and enhance recent Exchange initiatives 

including the Research Analysts’

Conflicts Rules,15 the Research Analysts 

Global Settlement,16 and new Corporate 

Governance Listing Standards.17

2. NYSE’s Statutory Basis 

The Exchange believes that the basis 

for the proposed rule change is the 

requirement under Section 6(b)(5) 18 of 

the Exchange Act that the rules of the 

Exchange 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.

3. NASD’s Purpose 

NASD is proposing new NASD Rule 

2712, which will better ensure that 

members avoid unacceptable conduct 

when they engage in the allocation and 

distribution of IPOs. The proposed rule 

change also is intended to sustain 

public confidence in the IPO process, 

which is critical to the continued 

success of the capital markets. 

In August 2002, the SEC requested 

that NASD and the NYSE convene a 

high-level group of business and 

academic leaders to review the IPO 

77810 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 

19See IPO Report, supra note 4.

20Letter from Alan R. Gordon dated November 

25, 2003; Letter from Alan Tobey dated November 

28, 2003; Letter from Allen Skaggs dated November 

30, 2003; Letter from Peter W. LaVigne, American 

Bar Association, dated February 4, 2004; Letter from 

Banner Capital Markets LLC dated January 9, 2004; 

Letter from Bruce E. Holmes, PE, dated November 

29, 2003; Letter from Harold Jones, Coughlin & 

Company Inc., dated January 9, 2004; Letter from 

Daniel M. Chernoff dated November 28, 2003; Letter 

from Don Brewer dated November 28, 2003; Letter 

from Edward J. Fedeli dated November 28, 2003; 

Letter from Edward M. Alterman, Fried, Frank, 

Harris, Shriver & Jacobson LLP, dated January 23, 

2004; Letter from HGM dated November 28, 2003; 

Letter from J D Harris dated November 28, 2003; 

Letter from Jandonbar@aol.com dated November 

30, 2003; Letter from Jeffrey E. Teich, Ph.D, dated 

November 25, 2003; Letter from 

Lertel7635@aol.com dated November 29, 2003; 

Letter from Malcolm R. Powell, M.D, dated 

November 28, 2003; Letter from Mandar Mirashi 

dated November 29, 2003; Letter from Mark H. 

Rapier dated November 30, 2003; Letter from 

Lawrence M. Ausubel, Market Design Inc., dated 

January 23, 2004; Letter from Mohme@aol.com

dated November 29, 2003; Letter from Lester Morse, 

Esq., Morse & Morse, PLLC dated January 15, 2004; 

Letter from Jed Bandes, Mutual Trust Co. of 

America Securities, dated November 28, 2003; 

Letter from Ralph A. Lambiase, NASAA, dated 

January 26, 2004; Letter from Mark G. Heesen, 

NVCA, dated January 16, 2004; Letter from Henry 

P. Williams, Oppenheimer & Co., Inc., dated 

January 9, 2004; Letter from Patricia Evans dated 

November 29, 2003; Letter from Paul N. Mullen 

dated November 28, 2003; Letter from Peggy 

Hutchinson dated November 29, 2003; Letter from 

Peter Locke dated November 28, 2003; Letter from 

RAMSkMgt@yahoo.com dated November 28, 2003; 

Letter from Richard O. Gregory dated November 29, 

2003; Letter from Rick Street dated November 29, 

2003; Letter from Scott Cook dated January 23, 

2004; Letter from John Faulkner, Securities Industry 

Association, dated January 23, 2004; Letter from 

Steve Antenozzi dated November 27, 2003; Letter 

from Thomas Weitzner dated November 30, 2003; 

Letter from Dr. Ann E. Sherman, University of Notre 

Dame, January 23, 2004; and Letter from William 

R. Hambrecht, WR Hambrecht & Co., dated January 

9, 2004. 21See 68 FR 62126 (October 21, 2003).

process, to recommend ways to address 

the problems evidenced during the hot 

market of the late 1990s and 2000, and 

to improve the underwriting process. In 

May 2003, the NYSE and NASD IPO 

Advisory Committee (‘‘Committee’’) 

issued its final report, which contains 

20 recommendations.19 In November 

2003, NASD published Notice to 

Members 03–72 requesting comment on 

the Committee’s recommendations 

applicable to NASD. The proposals in 

Notice to Members 03–72 supplemented 

proposals initially presented for 

comment in Notice to Members 02–55, 

which were filed with the SEC on 

September 15, 2003 and amended on 

December 9, 2003. NASD received 39 

comment letters 20 in response to Notice 

to Members 03–72, which are discussed 

below.

Although NASD is proposing new 

rules addressing IPO allocations, the 

federal securities laws and existing 

NASD rules already prohibit IPO 

allocation abuses. In recent years NASD 

has brought several disciplinary actions 

with respect to violations of these 

provisions. These laws and rules would 

continue to apply, and will continue to 

be the subject of possible NASD 

enforcement, after the proposed rule 

change becomes effective. Moreover, 

each provision in proposed NASD Rule 

2712 would apply independently. 

Compliance with one provision would 

not provide a safe harbor with respect 

to the other provisions of the Rule or 

with respect to other federal securities 

law and existing NASD rules. 

A. Prohibition of Abusive Allocation 

Arrangements 

NASD Rule 2712(a) would expressly 

prohibit a member and its associated 

persons from offering or threatening to 

withhold an IPO allocation as 

consideration or inducement for the 

receipt of compensation that is 

excessive in relation to the services 

provided by the member. This provision 

would prohibit this activity not only 

with respect to trading services, but to 

any service offered by the member. In 

addition, trading activity that serves no 

economic purpose other than to 

generate compensation for the member 

(e.g., wash sales) would be viewed as 

‘‘excessive’’ in relation to the services 

provided by the member, which are 

meaningless. 

NASD does not intend that this 

prohibition interfere with legitimate 

customer relationships. For example, 

this provision is not intended to 

prohibit a member from allocating IPO 

shares to a customer because the 

customer has separately retained the 

member for other services, when the 

customer has not paid excessive 

compensation in relation to those 

services. 

B. Prohibition of Spinning 

According to the NASD, ‘‘spinning,’’

or awarding IPO shares to the executive 

officers and directors of an investment 

banking client, divides the loyalty of the 

agents of the company (i.e., the 

executive officers and directors) from 

the principal (i.e., the company) on 

whose behalf they must act. The NASD 

believes this practice is inconsistent 

with just and equitable principles of 

trade. 

As proposed in Notice to Members

02–55, NASD Rule 2712(b) would have 

expressly prohibited a member and its 

associated persons from allocating IPO 

shares to an executive officer or director 

of a company on the condition that the 

executive officer or director, on behalf 

of the company, direct future 

investment banking business to the 

member. The rule also would have 

expressly prohibited IPO allocations to 

an executive officer or director as 

consideration for directing investment 

banking services previously rendered by 

the member to the company. 

The NYSE/NASD IPO Advisory 

Committee supported the spinning 

proposal in Notice to Members 02–55 

with several modifications. First, the 

Advisory Committee recommended that 

NASD prohibit an allocation of IPO 

shares to immediate family members of 

an executive officer or director 

whenever an allocation to the officer or 

director would be prohibited. The 

NASD amended the rule to eliminate 

the definition of immediate family and 

instead apply the prohibition on 

spinning just to persons ‘‘materially 

supported’’ by an executive officer or 

director of a company. This concept of 

material support is the same as used in 

NASD Rule 2790 (Restrictions on the 

Purchase and Sale of Initial Equity 

Public Offerings).21 This change 

narrows the scope of the spinning 

prohibition to include only those 

members of the immediate family that 

live in the same household as the 

executive officer or director and is 

similar in scope to the provisions in 

NASD Rule 2711 (Research Analysts 

and Research Reports). The definition, 

however, captures persons outside of an 

executive officer’s or director’s 

immediate family if such executive 

officer or director, directly or indirectly, 

provides more than 25% of the person’s 

income in prior calendar year.

Second, the Advisory Committee 

recommended that NASD bar IPO 

allocations to all executive officers and 

directors of a company with whom a 

member has an investment banking 

relationship. The Advisory Committee 

believed that the very existence of an 

investment banking relationship 

created, at the very least, an appearance 

of impropriety. NASD has amended the 

proposed rule change to incorporate this 

suggestion. 

Consequently, proposed NASD Rule 

2712(b) would prohibit the allocation of 

IPO shares to an executive officer or 

director of a company, or to persons 

materially supported by such an 

executive officer or director, if the 

member had received compensation 

from the company for investment 

banking services in the past 12 months. 

In addition, NASD has expanded the 

prohibition in proposed NASD Rule 

2712 (b)(2) to preclude allocations to 

executive officers or directors of a 

company if the member expects to 

receive or intends to seek investment 

banking business from the company in 

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 77811

22NASD rule 2711(h)(2)(A).

23See 68 FR 62126 (October 21, 2003).

the next 6 months. Previously, the 

proposed rule change only looked 

forward 3 months. The language of these 

provisions is based on similar language 

in NASD Rule 2711, concerning 

disclosure of investment banking 

compensation in research reports.22

In addition, the proposed rule change 

adds a presumption in paragraph (b)(2), 

stating that if a firm allocates IPO shares 

to an executive officer or director of a 

company and it subsequently receives 

investment banking business from that 

company, that the IPO allocations were 

made with the expectation or intent to 

receive such business. A member may 

rebut this presumption. According to 

the NASD, evidence to rebut this 

presumption could include procedures 

and information barriers that ensure that 

investment banking personnel involved 

in allocations do not have any 

information about the beneficial owners 

of retail accounts that received 

allocations. 

Under the proposed rule change, the 

accounts of executive officers and 

directors and their immediate family 

would, in effect, be restricted accounts 

similar to the accounts subject to the 

Free-Riding and Withholding 

Interpretation (IM–2110–1). 

Accordingly, NASD requests comment 

on whether the prohibition should be 

codified in NASD Rule 2790, which was 

recently approved by the SEC23 and is 

slated to replace the Free-Riding and 

Withholding Interpretation.

In Notice to Members 02–55, NASD 

proposed to amend NASD Rule 2710, 

the Corporate Financing Rule, to require 

that members file information regarding 

the allocation of IPO shares to executive 

officers and directors of a company that 

hires a member to be the book-running 

managing underwriter of the company’s 

IPO. This requirement was designed to 

assist the NASD in monitoring the 

possibility that allocations were made in 

return for investment banking business. 

Under the amended proposal, all 

allocations to executive officers or 

directors of investment banking clients 

or potential clients would be prohibited. 

According to the NASD, the proposed 

reporting requirement under NASD Rule 

2710 appears to be unnecessary and has 

been deleted from the proposal. 

C. Restrictions on Penalty Bids 

NASD Rule 2712(c) would prohibit 

members from penalizing associated 

persons whose customers have 

‘‘flipped’’ IPO shares that they have 

purchased through the member, unless 

a penalty bid, as defined in Rule 100 of 

SEC Regulation M has been imposed. 

Rule 100 defines a penalty bid as ‘‘an 

arrangement that permits the managing 

underwriter to reclaim a selling 

concession from a syndicate member in 

connection with an offering when the 

securities originally sold by the 

syndicate member are purchased in 

syndicate covering transactions.’’

Rule 104 of Regulation M and Nasdaq 

Stock Market Rule 4624 provide notice 

and record keeping requirements for 

penalty bids. Penalty bids may be 

assessed in the aftermarket of an 

offering that is under downward price 

pressure from an imbalance of sell 

orders relative to purchase orders. 

NASD does not oppose this use of 

penalty bids. However, according to the 

NASD, some members have penalized 

their registered representatives in 

connection with flipping by retail 

customers, even when the managing 

underwriter has not assessed a penalty 

bid on the syndicate members. For 

example, members have penalized their 

registered representatives by recouping 

the commission or credits previously 

granted for the sale of IPO shares. 

According to the NASD, the practical 

consequence of this practice is that 

registered representatives are penalized, 

and their retail customers may be 

pressured to retain their long position in 

the IPO shares, while representatives for 

institutional customers generally are not 

penalized at all for flipping activity by 

their customers. According to the 

NASD, the inequity of this selective 

penalization is most difficult to justify 

in light of the fact that most IPO shares 

are typically allocated to institutional 

customers. The NASD believes that the 

proposed rule would effectively prohibit 

this selective practice by permitting 

members to assess internal penalties on 

their registered representatives only 

when the managing underwriter has 

imposed a penalty bid on the syndicate 

members. The provision would not 

place any limit on syndicate penalty 

bids, however. This proposal was 

supported by the IPO Advisory 

Committee. 

D. IPO Pricing and Trading Practices 

a. Disclosure of Indications of Interest 

and Final Allocations 

The IPO Advisory Committee 

recommended that issuers establish a 

pricing committee to evaluate the 

proposed offering price, and that 

underwriters be required to disclose to 

the issuer’s pricing committee all 

indications of interest received before 

the issuer finalizes the IPO price. The 

Committee also recommended that 

underwriters be required to disclose to 

the issuer the final allocations after the 

offering is priced. The Committee 

concluded that greater participation by 

issuers in pricing and allocation 

decisions would better ensure that those 

decisions are consistent with the 

fiduciary duty of directors and 

management, and would provide 

management with more information to 

evaluate the underwriter’s performance. 

A requirement that issuers establish a 

pricing committee would necessitate a 

listing standard by The Nasdaq Stock 

Market and the NYSE. 

In Notice to Members 03–72, NASD 

solicited comment on a proposed rule 

change that would require that the 

underwriting agreement between the 

book-running lead manager and the 

issuer require that the book-running 

lead manager provide the issuer’s 

pricing committee (or its board of 

directors if the issuer does not have a 

pricing committee) with: (1) a regular 

report of indications of interest, 

including the names of interested 

investors and the number of shares 

indicated by each, and (2) after the 

closing date of the IPO, a report of the 

final allocation of shares available to the 

manager, including the names of 

purchasers and the number of shares 

purchased by each. 

According to the NASD, commenters 

generally supported these requirements 

but suggested the following changes. 

1. Institutional vs. Retail Disclosure 

Some commenters suggested that the 

report of indications of interest and final 

allocations should relate only to the 

‘‘institutional pot.’’ Several commenters 

suggested that it is not practical for the 

book-running lead manager to provide 

the names of all individual investors 

who have expressed an indication of 

interest because the book-running lead 

manager does not collect the names of 

individual retail investors. Commenters 

also stated that brokerage firms consider 

the names of their individual investor 

clients to be proprietary information 

and confidentiality concerns may limit 

the ability of brokerage firms to disclose 

the names of individual investors to the 

book-running lead manager. 

Commenters also stated that retail 

indications of interest are usually 

submitted to a firm’s syndicate desk as 

branch aggregates, not on an individualby-individual basis. Finally, 

commenters suggested that information 

regarding the names of individual 

investors is likely to be of limited use 

to an issuer because, in an IPO, there 

could be thousands of individual 

investors. 

NASD agrees that disclosure of each 

retail customer’s indications of interest 

77812 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 

(and subsequent allocations) would be 

of limited benefit to issuers and their 

pricing committees. The underlying 

purpose of this proposal is to ensure 

that the issuer or its pricing committees 

has a clear picture of the demand for its 

securities. Thus, the NASD believes that 

information about each individual retail 

investor would generally not be helpful. 

Accordingly, the NASD has revised the 

proposed rule change to require that the 

book-running lead manager disclose its 

institutional book of interest and to 

reflect retail demand in aggregate terms 

only. 

2. Timing of Disclosure 

One commenter suggested that rather 

than a ‘‘regular report’’ of indications of 

interest, the rule should require that the 

book-running lead manager provide 

information in a timely manner prior to 

pricing, or as frequently as requested by 

the issuer’s pricing committee. Another 

commenter suggested that the bookrunning lead manager should be 

required to provide a single report of the 

major institutional indications of 

interest shortly before or at the time of 

pricing the offering.

The proposed rule would require a 

regular report of indications of interest, 

which report should be made as often as 

appropriate, including such as when a 

material change occurs, or in connection 

with certain meetings with the issuer or 

its pricing committee, and always as 

frequently as requested by an issuer or 

its pricing committee. Indeed, the 

NASD’s understanding of the 

bookbuilding process is that most 

underwriters have frequent and even 

daily discussions with issuers about the 

level of indications of interest. The 

proposed rule change thus would codify 

this practice. 

In response to one commenter, 

however, NASD has amended the 

proposed rule change to require the 

book-running lead manager to provide 

the report on final allocations within a 

reasonable time after ‘‘settlement date’’

rather than after ‘‘closing date.’’ The 

settlement date and closing date can be 

the same date, but the term ‘‘settlement 

date’’ may be more precisely understood 

as the date on which the issuer transfers 

its shares in return for offering proceeds 

from the syndicate. 

3. Additional Disclosure 

One commenter suggested that issuers 

would benefit from receiving 

information regarding relationships that 

underwriters have with purchasers. This 

commenter suggested that issuers would 

benefit from receiving additional 

information regarding the intended 

holding periods of purchasers, since 

issuers generally favor allocations to 

long-term holders over ‘‘flippers.’’

According to the NASD, this 

information generally may be useful or 

relevant to issuers. As the specificity of 

information about past account activity 

increases, however, financial privacy 

concerns also increase. Brokerage 

customers may reasonably expect that 

their broker will keep particular 

information about trades they have 

made in their accounts confidential. In 

addition, SEC Regulation M prohibits 

underwriters during the bookbuilding 

process from attempting to induce 

purchases in the aftermarket. This limits 

some of the information the 

underwriters are permitted to obtain 

and provide to the issuer regarding 

whether any particular account will be 

buying or selling the securities in the 

aftermarket. Accordingly, NASD has not 

included this requirement as part of the 

proposed rule change. 

One commenter suggested that 

disclosure of different levels of interest 

at different prices should be required 

and that NASD should require a 

graphical display of this information. 

NASD believes that members should be 

able to design their forms of 

communication on indications of 

interest and final allocations as 

appropriate to particular offerings and 

issuers. Members, of course, may 

compete for investment banking 

business by offering certain disclosures 

and forms of disclosure, and likewise, 

issuers may condition an engagement 

with an investment bank on certain 

disclosures and forms of disclosure. 

4. Underwriting Agreements 

Several commenters stated that the 

obligation to provide indications of 

interest to the issuer should not be 

included in the underwriting agreement 

because the underwriting agreement is 

not signed until after pricing of the 

offering. These commenters suggested 

that NASD impose the obligation on the 

book-running lead manager directly. 

NASD agrees and has amended the 

proposed rule change accordingly. 

b. Limitation on Market Orders for One 

Day Following an IPO 

The IPO Advisory Committee 

recommended a prohibition on market 

orders for one trading day following an 

IPO. The Committee concluded that in 

light of the volatility of IPO issues, 

investors who place market orders 

immediately following an IPO may 

inadvertently purchase at prices that 

neither reflect their true investment 

decisions nor their reasonable 

expectations. Commenters, such as the 

SIA, generally opposed this proposal. 

Some commenters suggested that 

educating retail investors about the 

appropriate use of limit orders was the 

appropriate remedy. Commenters also 

stated that restricting investors only to 

limit orders on the first day of trading 

will artificially constrain trading 

activity and could impair the process by 

which a market price is determined. 

NASD is not persuaded by the 

commenters that banning market orders 

for IPOs on the first trading day will 

have significant effects on liquidity or 

price discovery. Institutional investors 

rely almost exclusively on limit orders 

in the IPO aftermarket. NASD requests 

further comment on why the use of limit 

orders by retail investors will not allow 

markets to develop sufficient liquidity 

or become an effective tool for price 

discovery. 

c. Returned Shares 

The IPO Advisory Committee offered 

a recommendation concerning IPO 

shares that are returned to the 

underwriter after completion of 

distribution. The Committee noted that 

currently if an IPO’s shares trade at an 

immediate aftermarket premium, 

underwriters can allocate returned 

shares to favored customers at the IPO 

price, providing what might be a 

guaranteed profit to those customers. To 

address this concern, NASD solicited 

comment on a proposed rule change 

that would require underwriters first to 

allot returned shares to the existing 

syndicate short position. If there is no 

short position, or if the short position 

already has been covered by the time 

the shares are returned, the proposal 

would have permitted members to sell 

the remaining returned shares on the 

open market and return net profits to 

the issuer. The proposed rule change 

provided that if the market price does 

not rise above the offering price, then 

the underwriter would be permitted to 

sell the shares at a loss for its account 

or retain the shares by placing them in 

its investment account.

Commenters and SEC staff raised 

concerns that, among other things, the 

proposal’s disposition of returned 

shares in the event that there is no 

existing short position may conflict with 

Regulation M. In response to these 

concerns, NASD has amended the 

proposed rule change to require that if 

no existing short position exists at the 

time that returned shares are received 

by a member firm, then the members 

must offer those shares to unfilled 

customers’ orders at the public offering 

price pursuant to a random allocation 

methodology. While the proposed rule 

change does not specify a particular 

methodology, NASD expects that 

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 77813

24See Rule 2860(b)(23)(C).

25Tying the period of prior notice to a particular 

market or the average trading volume, as suggested 

by one commenter, would, in NASD’s view, be 

unnecessarily complex.

members will develop systems similar 

to those used to allocate options 

exercise notices.24 In general, these 

systems will require sequencing of all 

relevant accounts, assigning a sequence 

number to each account, and then 

generating a random number to identify 

where in the sequence to begin offering 

returned shares. According to the 

NASD, in requiring the use of a random 

allocation methodology, NASD prevents 

members from being in a position to 

benefit by selecting a particular 

customer or group of customers to 

receive a guaranteed profit.

d. Limitations on ‘‘Friends and Family’’

Programs 

The IPO Advisory Committee 

recommended requiring that any lockup that applies to shares owned by 

officers and directors include the shares 

purchased by those individuals in the 

‘‘friends and family’’ program. In Notice 

to Members 03–72, NASD solicited 

comment on a proposed rule change to 

require that any lock-up or restriction 

on the transfer of the issuer’s shares also 

apply to issuer-directed shares held by 

officers and directors of the issuer. 

According to the NASD, commenters 

generally supported this proposal. One 

commenter believed that this proposal 

should be effected by a listing 

requirement rather than an NASD rule. 

NASD disagrees. Insofar as the lock-up 

agreement is a contractual arrangement 

between the underwriter and the issuer, 

the NASD believes that imposing the 

requirement on the underwriter is 

appropriate. 

e. Requirements Concerning Lock-Up 

Exemptions 

The IPO Advisory Committee 

concluded that investors reasonably 

expect that the issuer’s directors, 

officers, and large pre-IPO shareholders 

who agree to ‘‘lock up’’ their shares will 

be bound by those agreements for the 

stated period. The Committee 

recommended that the lead underwriter 

announce any lock-up exemption 

through a major news service. NASD’s 

proposed rule change would require 

that the underwriting agreement provide 

that at least two business days before 

the release or waiver of any lock-up or 

other restriction on the transfer of the 

issuer’s shares, the book-running lead 

manager will notify the issuer of the 

impending release or waiver and 

announce the impending release or 

waiver through a national news service. 

Several commenters expressed 

concern that requiring the book-running 

lead manager to announce an 

impending release or waiver of a lockup restriction on officers and directors 

would result in a large amount of 

meaningless information regarding sales 

of immaterial amounts of securities. 

NASD disagrees. According to the 

NASD, lock-up restrictions generally 

align the investment interest of the 

insiders subject to the lock-up with 

investors in the offering during the 

period of the lock-up. Thus, investors 

should find notifications of a lock-up 

release or waiver to be important and 

relevant information. 

Another commenter questioned 

whether this notification requirement 

was intended to apply to the release of 

the issuer, selling shareholder, or both. 

According to the NASD, the proposed 

rule change will apply to a release or 

waiver of lock-ups by the issuer and any 

selling shareholder. While in many 

cases the release of an issuer will be 

followed by the filing of a registration 

statement before securities may be sold, 

that is not always the case (e.g., Rule 

144A offerings). Accordingly, NASD has 

not proposed to exempt waiver of issuer 

lock-ups from the proposed rule change. 

One commenter also suggested that 

the notice requirement should be 

subject to some materiality or de 

minimis exception and should apply 

only if the release relates to a sale into 

the market. This commenter suggested 

that the notification requirement should 

not apply to a release that allows only 

for minor sales or transfers of stock in 

which the transferee agrees to lock-up 

restrictions identical to those applicable 

to the transferor, such as transfers by a 

shareholder to a family trust or to a 

charity. NASD does not support this 

modification. NASD believes that 

investors expect that lock-ups will be 

applied for their stated term, and that 

even small sales may be material 

information. NASD also does not 

believe that there should be an 

exemption where the transferee agrees 

to identical lock-up restrictions. 

According to the NASD, the fact that the 

shareholder or issuer no longer has 

accepted investment risk with regard to 

those securities is information that 

should be available to the market. In 

addition, if a transferee agrees to 

identical lock-up restrictions, any 

waiver or release of such restrictions as 

applied to such persons also must be 

preceded by a public announcement 

through a major news service. 

A commenter suggested that the 

timing of the announcement should be 

based upon when a sale into the market 

may first take place, not when the 

release is to take place. Another 

commenter stated that two days’ prior 

notice might not be sufficient. NASD 

believes that the timing of the 

announcement should be triggered by 

the release date, not the eventual sale 

date, and that two days seems to be an 

acceptable period.25 In addition, if the 

waiver does not permit the immediate 

sale of securities into the market, then 

additional disclosure should be 

provided indicating when such sales 

may be permitted.

Finally, one commenter believed that 

disclosure by the issuer in Form 8–K 

would be sufficient. NASD disagrees. 

Form 8–K notification occurs after a sale 

has been made. NASD agrees with the 

IPO Advisory Committee that investors 

expect that lock-ups will be adhered to, 

and that they should be provided 

advance notice of any release or waiver. 

f. Rulemaking Concerning the Pricing of 

Unseasoned Issuers 

As discussed in Notice to Members

03–72, many IPO issuers in the late 

1990s and 2000 had little or no revenues 

and subsequently experienced a 

dramatic run-up and decline in their 

stock price. Some critics have taken the 

position that the run-up demonstrates 

that these IPOs were underpriced; 

others have countered that the 

subsequent significant drop in the price 

of these securities, at times well below 

the IPO price, demonstrates that the 

offerings were actually overpriced. 

NASD solicited comment on three 

possible approaches to the regulation of 

IPO pricing of unseasoned issuers. 

Unlike the other items in Notice to 

Members 03–72, these were presented as 

concepts only and NASD did not 

propose specific rule text. 

The first proposal was a requirement 

for an underwriter to retain an 

independent broker-dealer to opine that 

the initial IPO range at which the 

offering is marketed and the final 

offering price are reasonable and require 

that the independent broker-dealer’s 

opinion is disclosed in the prospectus. 

Commenters generally did not support 

this proposal. The most common 

criticism was that the proposal would 

impose considerable cost on issuers. 

Commenters added that the cost of the 

independent opinion would be 

especially burdensome on smaller 

issuers. One commenter believed that 

the cost for the opinion would be 

affected by the assumption of liability 

that would result from the requirement 

to disclose the independent opinion in 

the prospectus. Another commenter 

argued that the responsibility for 

77814 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 

26National Venture Capital Association letter to 

Barbara Z. Sweeney (Sept. 9, 2002); the Association 

for Investment Management and Research letter to 

Barbara Z. Sweeney (Sept. 23, 2002); North 

American Securities Administrators Association, 

Inc. letter to Barbara Z. Sweeney (Sept. 23, 2002); 

and Securities Industry Association letter to Barbara 

Z. Sweeney (Sept. 24, 2002).

recommending a public offering price 

should not be forced on another brokerdealer that is less involved in the 

offering process and likely to be less 

informed about the issuer and its 

securities. Several commenters noted 

that the independent broker-dealer 

rendering a pricing opinion would need 

to rely on information from the lead 

underwriter, or due diligence costs 

would be prohibitive. Finally, one 

commenter noted that issuers already 

have the ability to obtain independent 

pricing opinions from a second brokerdealer when they perceive a need for 

one. 

In light of these concerns, NASD does 

not intend to propose a rule requiring an 

independent pricing opinion at this 

time. 

The second proposal was to require 

the managing underwriter to use an 

auction or other system to collect 

indications of interest to help establish 

the final IPO price. Commenters 

expressed varying degrees of support for 

this proposal. Many commenters that 

appear to be individual investors 

supported implementation of the 

‘‘Dutch Auction’’ though they offered 

little explanation. Other commenters 

opposed the adoption of any regulation 

that would require underwriters to use 

an auction approach to price setting. 

Several commenters stated that the 

market, and not regulators, should 

decide what pricing and allocation 

models are appropriate for particular 

IPOs. One commenter supported the 

development of alternatives to the 

bookbuilding process, but would not 

support the use of an auction as the only 

alternative. Finally, one commenter 

stated that the auction method is 

impractical for small broker-dealers 

because they are not familiar with this 

pricing mechanism. 

Recent developments have focused 

increased attention on the use of 

auctions, and it appears that more 

issuers and investment banks are using 

or considering the use of auctions to 

assist in pricing IPOs. Given these 

developments, NASD finds it premature 

to mandate use of auction systems. 

The third proposal was to require the 

managing underwriter to include a 

valuation disclosure section in the 

prospectus with information about how 

the managing underwriter and issuer 

arrived at the initial price range and 

final IPO price, such as reviewing the 

issuer’s one-year projected earnings or 

P/E ratios and share price information of 

comparable companies. Commenters 

expressed varied levels of support for 

this proposal. Some commenters 

strongly supported the proposed 

valuation disclosure requirement. One 

such commenter suggested that the 

valuation disclosure should be 

accompanied by an explicit fiduciary 

duty making underwriters accountable 

for their IPO pricing decisions. This 

commenter expressed concern that 

valuation rationales and earnings 

estimates generally are made available 

only to the institutional market through 

the book-running underwriter’s research 

analyst, creating an ‘‘information 

monopoly’’ that is inaccessible to 

smaller institutions and retail investors. 

This commenter stated that the 

inclusion of earnings estimates in the 

prospectus is a very important step in 

allowing all investors to receive equal 

access to IPO pricing information in 

order for the lead underwriter to 

develop a complete and accurate 

demand curve. 

Several commenters noted that the 

initial price range and final price reflect 

a large number of factors, including 

current market conditions. One 

commenter noted that pricing 

determinations are based not only on 

information about the issuer, its past 

results, current financials, and projected 

earnings, but also on information about 

market interest, performance of the 

stock market in the days preceding 

pricing, and the willingness of the 

issuer to accept a lower share price to 

sell into a down market. Some 

commenters noted that much pricing 

information, such as the selection of 

comparable companies is subjective. 

One commenter noted that projections 

of future earnings are one of many data 

points used by investors to determine 

the price and quantity of shares they are 

interested in purchasing. This 

commenter noted that the market 

ultimately determines price, and price 

may be driven by ‘‘market psychology’’

and other factors that are difficult to 

quantify. 

Several commenters also expressed 

reservations about the valuation 

disclosure proposal because it would 

open the issuer and underwriter to 

future litigation if the projections were 

not met. Some commenters suggested 

that any proposal related to disclosure 

of issuer projections would need to be 

accompanied by a safe harbor to protect 

issuers and underwriters from liability 

in future litigation. These commenters 

generally favored expansion of the safe 

harbor under Section 27A of the 

Securities Act of 1933 to IPOs. 

Some commenters suggested that the 

SEC, rather than NASD, should address 

the matter of valuation disclosure since 

it involves a disclosure requirement for 

issuers. One commenter added that the 

SEC also would be able to address the 

attendant liability concerns affecting 

issuers and underwriters. 

Based on the comments received, 

NASD believes that the SEC is the more 

appropriate regulator to address the 

inclusion of projections. The SEC 

regulates the contents of a prospectus 

and also is in a position to address 

issues of liability. 

4. Statutory Basis 

NASD believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Exchange 

Act, which require, among other things, 

that NASD’s rules be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. NASD believes that the 

new, specifically targeted provisions in 

the proposed rule changes will aid 

member compliance efforts and help to 

maintain investor confidence in the 

capital markets.

(B) Self-Regulatory Organizations’

Statements on Burden on Competition 

The NYSE and NASD do not believe 

that the proposed rule changes will 

result in any burden on competition that 

is not necessary or appropriate in 

furtherance of the purposes of the 

Exchange Act. 

(C) Self-Regulatory Organizations’

Statements on Comments on the 

Proposed Rule Changes Received from 

Members, Participants, or Others 

The NYSE has neither solicited nor 

received written comments on the 

proposed rule change. NASD requested 

written comments in Notice to Members

03–72 as discussed in Section II(A)(1) 

above. Additionally, NASD requested 

written comments in Notice to Members

02–55 and received four comment 

letters.26 According to the NASD, all of 

the comment letters generally supported 

the proposal. The National Venture 

Capital Association, the Association for 

Investment Management and Research 

(‘‘AIMR’’) and the North American 

Securities Administrators Association, 

Inc. (‘‘NASAA’’) supported the 

amendments. NASAA noted that many 

of the prohibitions go to conduct that 

already is unlawful.

The Securities Industry Association 

(‘‘SIA’’) stated that ‘‘the new and 

Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 77815

27See Securities Exchange Act Release No. 50831 

(December 9, 2004), 69 FR 75774 (December 17, 

2004), which is available at http://www.sec.gov/

rules/proposed/33-8511.htm.

28 Id.

29The proposed amendments to Rule 104 of 

Regulation M include a proposal to prohibit penalty 

bids altogether, whereas proposed NASD Rule

2712(c) and NYSE Rule 470(c) are based on the 

continued use of penalty bids. Another potential 

‘‘inconsistency’’ may be a proposed new Rule 106 

of Regulation M and proposed NYSE Rule 470(A) 

and NASD Rule 2712(a) regarding quid pro quo 

allocations. See id.

specifically targeted provisions in 

NASD Rule 2712 would aid member 

compliance efforts and help to maintain 

investor confidence in the capital 

markets.’’ The SIA supports proposed 

NASD Rule 2712(a) but has concerns 

about how ‘‘excessive’’ compensation 

might be interpreted and suggests that 

the term be changed to ‘‘clearly 

excessive.’’ NASAA also noted that 

‘‘excessive’’ compensation is not 

defined in the Rule and believes the 

term creates an exception that 

undermines the clarity of the provision. 

NASD believes that use of an 

‘‘excessive’’ compensation standard 

takes into account all of the facts and 

circumstances surrounding the services 

provided. This flexibility would allow 

members and NASD to take into account 

the risk and effort involved in the 

transaction, usual and customary rates 

charged for similar services at broker/

dealers in the same kind of business, 

and regional norms in setting prices for 

financial services. 

As published in Notice to Members

02–55, proposed NASD Rule 2712 

would have prohibited certain forms of 

aftermarket tie-in agreements. The SIA 

recommended that the language in the 

discussion section on aftermarket tie-ins 

‘‘clarify that inquiries and discussions 

regarding a potential customer’s interest 

in purchasing and holding a security not 

be deemed solicitations for purposes of 

[the aftermarket tie-in provision].’’

AIMR believes the provision may be 

difficult to supervise or monitor and 

suggests that NASD ‘‘simply require 

heightened supervisory scrutiny of all 

IPO allocations and distributions.’’

NASD has determined not to pursue a 

proposed rule change addressing 

aftermarket tie-in arrangements at the 

present time. 

According to the NASD, the SIA 

supported the proposal to prohibit 

allocations to an executive officer or 

director as a condition or as 

consideration for investment banking 

business, but noted that it may be 

difficult to determine whether an 

allocation has been done as a condition 

or as consideration for investment 

banking business. The proposal as 

amended would bar IPO allocations to 

all executive officers and directors of a 

company with whom a member has an 

investment banking relationship. 

As proposed in the Notice to Members

02–55, the amendments to NASD Rule 

2710 would have required that a 

member file a statement with NASD 

regarding whether an executive officer 

or director participated in the selection 

of the book-running managing 

underwriter. The SIA noted that 

underwriters cannot know with 

certainty who participated in their 

selection or the significance of their 

roles. In addition, the SIA believes that 

the proposed requirement to file 

information under NASD Rule 

2710(b)(6)(A)(viii) with respect to the 

180-day calendar period immediately 

following the effective date of an 

offering would be burdensome. As 

discussed above, NASD has modified 

the proposal to eliminate the proposed 

amendment to NASD Rule 2710. 

The SIA recommends that the time 

period specified in proposed NASD 

Rule 2712(c)(2)(A) commence on the 

offering date instead of the effective date 

of an offering. The SIA notes that the 

offering date tracks the language used in 

the standard agreement among 

underwriters, which is used by member 

firms to track the period in which a 

penalty bid may be used. NASD has 

amended the proposal to make the 

change suggested by the SIA. 

Accordingly, the ‘‘offering date’’ for 

purposes of the rule is the date after 

pricing on which members first sell 

shares to the public. 

As proposed in Notice to Members

02–55, proposed NASD Rule 2712 

would have included a requirement that 

each member subject to the rule must 

adopt and implement written 

procedures reasonably designed to 

ensure that the member and its 

employees comply with the provisions 

of the rule. NASAA notes that members 

already are required to implement 

procedures to ensure compliance with 

NASD rules and the provision is 

unnecessary. NASD agrees that such 

procedures already are required by 

members and the provision has been 

deleted. 

III. Date of Effectiveness of the 

Proposed Rule Changes 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 SROs consent, the 

Commission will: 

A. By order approve such proposed 

rule changes, or

B. Institute proceedings to determine 

whether the proposed rule changes 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing 

proposals, including whether the 

proposed rule changes are consistent 

with the Exchange Act and whether 

there are any differences between the 

NYSE and NASD proposals that present 

compliance or interpretive issues. 

On October 13, 2004, the Commission 

approved the issuance of proposed 

amendments to Regulation M (the antimanipulation rule governing securities 

offerings).27 Among other things, the 

proposed amendments would amend 

Rule 104 of Regulation M to prohibit the 

use of penalty bids and would add a 

new Rule 106 to expressly prohibit 

distribution participants, issuers, and 

their affiliated purchasers, directly or 

indirectly, from demanding, soliciting, 

attempting to induce, or accepting from 

their customers any consideration in 

addition to the stated offering price of 

the security.28 The Commission requests 

additional comment on any differences 

between the proposed amendments to 

Regulation M and the SRO proposed 

rule changes, particularly with respect 

to the proposals regarding penalty bids 

and quid pro quo allocations,29 which 

may present compliance or interpretive 

issues.

In addition, the Commission 

specifically solicits comment on 

proposed NASD Rule 2712(b)(2) and 

NYSE Rule 470(B)(2), the so-called 

spinning restrictions. In particular, the 

Commission requests comment on the 

SROs’ proposal to employ a rebuttable 

presumption with respect to members 

allocating IPO shares to an executive 

officer or director of a company (or 

person materially supported by such 

officer or director) if the member 

expects to receive or intends to seek 

investment banking business from the 

company in the next six months. We 

note that both the NYSE/NASD IPO 

Advisory Committee, Report and 

Recommendations (May 2003) (‘‘IPO 

Report’’) and the Voluntary Initiative 

Regarding Allocations of Securities in 

‘‘Hot’’ Initial Public Offerings to 

Corporate Executives and Directors

(April 28, 2003) (‘‘Voluntary Initiative’’) 

included absolute prohibitions on 

allocations of IPO shares to such 

persons. 

The SRO proposed spinning 

restrictions would apply to persons 

77816 Federal Register / Vol. 69, No. 248 / Tuesday, December 28, 2004 / Notices 

30The SROs proposed to define ‘‘material 

support’’ to mean ‘‘directly or indirectly providing 

more than 25% of a person’s income in the prior 

calendar year. Persons living in the same household 

are deemed to be providing each other with 

material support.’’ See NYSE Rule 470(F)(3) and 

NASD Rule 2712(d)(3).

31 ‘‘Material support’’ is defined to include 

persons living in the same household or who 

receive more than 25% of their ‘‘income’’ from the 

officer or director. However, it may exclude close 

relations—such as a son or daughter—who do not 

live in the same household and to do not receive 

more than 25% of their ‘‘income’’ from the officer 

or director.

32See Rule 100 of Regulation M for definition of 

‘‘completion of participation in a distribution.’’ 17 

CFR 242.100. In order to comply with Regulation 

M, an underwriter or other distribution participant 

generally cannot commence trading in IPO 

securities in the secondary market unless they have 

completed their participation in the offering. 33 17 CFR 200.30–3(a)(12).

‘‘materially supported’’ by an executive 

officer or director.30 The Commission 

requests comment on whether the 

proposed spinning restrictions should 

also apply to ‘‘immediate family 

members’’ who do not live in the same 

household and do not receive more than 

25% of their ‘‘income’’ from the officer 

or director, as is the case with the 

Voluntary Initiative and the IPO 

Report.31 Should the proposed spinning 

restrictions also prohibit investment 

banking personnel from participating in 

the member firm’s allocation of IPO 

shares to specific individual customers, 

as in the Voluntary Initiative?

In addition, the Commission 

specifically solicits comment on 

whether the proposals concerning 

‘‘returned shares’’ in NYSE Rule 

470(D)(3) and NASD Rule 2712(e)(3) 

should clarify any possible implications 

under Regulation M, particularly with 

respect to continuation of the 

distribution.32

Persons making written submissions 

should file six copies thereof with the 

Secretary, Securities and Exchange 

Commission, 450 Fifth Street, NW., 

Washington, DC 20549–0609. 

Comments also may be submitted 

electronically at the following e-mail 

address: rule-comments@sec.gov. All 

comment letters should refer to File 

Nos. SR–NYSE–2004–12 and SR–

NASD–2003–140. These file numbers 

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. 

Copies of the submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

changes that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule changes 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 filings will also be 

available for inspection and copying at 

the principal offices of the NYSE and 

NASD. All submissions should refer to 

File Nos. SR–NYSE–2004–12 and SR–

NASD–2003–140 and should be 

submitted by January 18, 2005.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.33

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 04–28274 Filed 12–27–04; 8:45 am] 

BILLING CODE 8010–01–P

SMALL BUSINESS ADMINISTRATION

Interest Rates 

The Small Business Administration 

publishes an interest rate called the 

optional ‘‘peg’’ rate (13 CFR 120.214) on 

a quarterly basis. This rate is a weighted 

average cost of money to the 

government for maturities similar to the 

average SBA direct loan. This rate may 

be used as a base rate for guaranteed 

fluctuating interest rate SBA loans. This 

rate will be 4.5 (41⁄2) percent for the 

January-March quarter of FY 2005.

James E. Rivera, 

Associate Administrator for Financial 

Assistance.

[FR Doc. 04–28397 Filed 12–27–04; 8:45 am] 

BILLING CODE 8025–01–P

SOCIAL SECURITY ADMINISTRATION

Privacy Act of 1974, as Amended; New 

System of Records and New Routine 

Use Disclosures

AGENCY: Social Security Administration 

(SSA).

ACTION: Proposed new system of records 

and proposed routine uses. 

SUMMARY: In accordance with the 

Privacy Act (5 U.S.C. 552a(e)(4) and 

(e)(11)), we are issuing public notice of 

our intent to establish a new system of 

records entitled Medicare Part D and 

Part D Subsidy File, 60–0321, and 

routine uses applicable to the system of 

records. We also are issuing notice that 

we may disclose personally identifiable 

information from the Medicare Part D 

and Part D Subsidy File to consumer 

reporting agencies in accordance with 5 

U.S.C. 552a(b)(12) and 31 U.S.C. 

3711(e). We invite public comment on 

this proposal.

DATES: We filed a report of the proposed 

Medicare Part D and Part D Subsidy File

and the applicable routine uses with the 

Chairman of the Senate Committee on 

Governmental Affairs, the Chairman of 

the House Committee on Government 

Reform, and the Director, Office of 

Information and Regulatory Affairs, 

Office of Management and Budget 

(OMB) on December 16, 2004. The 

proposed Medicare Part D and Part D 

Subsidy File system of records and the 

proposed routine uses will become 

effective on January 25, 2005, unless we 

receive comments warranting that they 

not be effective.

ADDRESSES: Interested individuals may 

comment on this publication by writing 

to the Executive Director, Office of 

Public Disclosure, Office of the General 

Counsel, Social Security 

Administration, Room 3–A–6 

Operations Building, 6401 Security 

Boulevard, Baltimore, Maryland 21235–

6401. All comments received will be 

available for public inspection at the 

above address.

FOR FURTHER INFORMATION CONTACT: Ms. 

Christine W. Johnson, Strategic Issues 

Team, Office of Public Disclosure, 

Office of the General Counsel, Social 

Security Administration, Room 3–C–1 

Operations Building, 6401 Security 

Boulevard, Baltimore, Maryland 21235–

6401, e-mail address at 

chris.w.johnson@ssa.gov, or by 

telephone at (410) 965–8563.

SUPPLEMENTARY INFORMATION: 

I. Background and Purpose of the 

Proposed New Medicare Part D and 

Part D Subsidy File System of Records 

A. General Background 

On December 8, 2003, the Medicare 

Prescription Drug, Improvement, and 

Modernization Act (MMA) of 2003, was 

signed into law (Public Law 108–173). 

The MMA creates a voluntary 

prescription drug benefit program under 

new Part D of Medicare for all 

individuals eligible for Medicare Part A 

or Part B under which a monthly 

premium is required to assist in the 

purchase of prescription drugs. The new 

coverage, which is effective January 1, 

2006, will assist Medicare-eligible 

seniors, people with disabilities and 

persons with end-stage renal disease 

with their prescription drug costs. In 

2006, almost all of the 43 million 

Medicare beneficiaries will have a 

chance to enroll in the subsidized drug 

cost program. 

The MMA also created a premium 

subsidy program for Medicare