[Federal Register Volume 69, Number 248 (Tuesday, December 28, 2004)]
[Notices]
[Pages 77804-77816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28274]


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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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    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.

[[Page 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 book-
running 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 
book-running lead manager must provide to

[[Page 77806]]

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 issuer-directed 
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 book-
running 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.
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    \3\ The 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).
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(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\
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    \4\ NYSE/NASD IPO Advisory Committee, Report and 
Recommendations, (May 2003), which is available at http://www.nyse.com/pdfs/iporeport.pdf (``IPO Report'').
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    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\
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    \5\ See IPO Report, page 3.
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    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

[[Page 77807]]

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

[[Page 77808]]

recent stock market bubble of the late 1990s.
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    \6\ 17 CFR 242.104.
    \7\ 17 CFR 242.100.
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    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.
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    \8\ 17 CFR 240.17a-2(c)(1).
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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 book-running 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.
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    \9\ See IPO Report, page 13.
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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 book-running 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.
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    \10\ Recommendation 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.
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    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 lock-up 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 pre-IPO shareholders who agree to ``lock-up'' 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

[[Page 77809]]

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\
---------------------------------------------------------------------------

    \11\ See also, NYSE Listed Company Manual, Section 202.06 
(Procedure for Public Release of Information).
---------------------------------------------------------------------------

    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 lock-up 
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.
---------------------------------------------------------------------------

    \12\ See NYSE Rule 472(f)(4).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \13\ See IPO Report, pages 6 and 7.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \14\ See IPO Report, page 6.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \15\ See Securities Exchange Act Release No. 48252 (July 29, 
2003), 68 FR 45875 (August 4, 2003), (SR-NYSE 2002-49).
    \16\ See Litigation Release No. 18438 (October 31, 2003).
    \17\ See Securities Exchange Act Release No. 48745 (November 4, 
2003) (SR-NYSE-2002-33).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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

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

[[Page 77810]]

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.
---------------------------------------------------------------------------

    \19\ See IPO Report, supra note 4.
    \20\ Letter 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 
<a href="/cdn-cgi/l/email-protection#400a212e242f2e22213200212f2c6e232f2d"><span class="__cf_email__" data-cfemail="094368676d66676b687b49686665276a6664">[email protected]</span></a> dated November 30, 2003; Letter from Jeffrey E. 
Teich, Ph.D, dated November 25, 2003; Letter from <a href="/cdn-cgi/l/email-protection#034f667177666f3435303643626c6f2d606c6e"><span class="__cf_email__" data-cfemail="216d445355444d1617121461404e4d0f424e4c">[email protected]</span></a> 
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 <a href="/cdn-cgi/l/email-protection#622f0d0a0f0722030d0e4c010d0f"><span class="__cf_email__" data-cfemail="521f3d3a3f3712333d3e7c313d3f">[email protected]</span></a> 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 <a href="/cdn-cgi/l/email-protection#d684979b85bd9bb1a296afb7beb9b9f8b5b9bb"><span class="__cf_email__" data-cfemail="55071418063e183221152c343d3a3a7b363a38">[email protected]</span></a> 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \21\ See 68 FR 62126 (October 21, 2003).
---------------------------------------------------------------------------

    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

[[Page 77811]]

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\
---------------------------------------------------------------------------

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

    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 SEC \23\ and is slated to 
replace the Free-Riding and Withholding Interpretation.
---------------------------------------------------------------------------

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

    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 individual-by-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

[[Page 77812]]

(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 book-running 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

[[Page 77813]]

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.
---------------------------------------------------------------------------

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

d. Limitations on ``Friends and Family'' Programs
    The IPO Advisory Committee recommended requiring that any lock-up 
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 
lock-up 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.
---------------------------------------------------------------------------

    \25\ Tying 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.
---------------------------------------------------------------------------

    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

[[Page 77814]]

recommending a public offering price should not be forced on another 
broker-dealer 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 broker-dealer 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.
---------------------------------------------------------------------------

    \26\ National 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).
---------------------------------------------------------------------------

    The Securities Industry Association (``SIA'') stated that ``the new 
and

[[Page 77815]]

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 anti-manipulation 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.
---------------------------------------------------------------------------

    \27\ See 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.
    \29\ The 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.
---------------------------------------------------------------------------

    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

[[Page 77816]]

``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?
---------------------------------------------------------------------------

    \30\ The 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \32\ See 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.
---------------------------------------------------------------------------

    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: <a href="/cdn-cgi/l/email-protection#2351564f460e404c4e4e464d5750635046400d444c55"><span class="__cf_email__" data-cfemail="4c3e392029612f2321212922383f0c3f292f622b233a">[email protected]</span></a>. 
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\
---------------------------------------------------------------------------

    \33\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-28274 Filed 12-27-04; 8:45 am]
BILLING CODE 8010-01-P


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