39640 Federal Register / Vol. 65, No. 124 / Tuesday, June 27, 2000 / Notices

10 15 U.S.C. 78s(b)(2).

11 17 CFR 200.30–3(a)(12).

1 17 CFR 270.23c–3(b).

2 15 U.S.C. 80a–1, et seq.

3See February 28, 2000 letter and attachments

from Joan C. Conley, Secretary, NASD Regulation to

Katherine A. England, Assistant Director, Division

of Market Regulation (‘‘Division’’), SEC

(‘‘Amendment No. 1’’). In Amendment No. 1, NASD

Regulation made changes to the language of the

proposed new rule. Exhibits 2 through 4 that were

attached to the original filing are incorporated by

reference in Amendment No. 1.

4See March 17, 2000 letter from Suzanne E.

Rothwell, Chief Counsel, Corporate Financing,

NASD Regulation to Katherine A. England,

Assistant Director, Division, SEC (‘‘Amendment No.

2’’). In Amendment No. 2, NASD Regulation made

minor, technical changes to the proposed new rule.

5See Securities Exchange Act Release No. 42601

(March 30, 2000), 65 FR 18405 (SR–NASD–99–74).

6See April 27, 2000 letter from Kathy D. Ireland,

Associate Counsel, Investment Company Institute

(‘‘ICI’’), to Jonathan G. Katz, Secretary, SEC (‘‘ICI

Letter’’).

7 17 CFR 270.23c–3(b).

8 15 U.S.C. 80a–1, et seq.

9 Id.

10 15 U.S.C. 80a–5(a)(2).

11Section 5(a)(1) of the 1940 Act defines ‘‘openend company’’ as ‘‘a management company which

is offering for sale or has outstanding any

redeemable security for which it is the issuer.’’

Section 5(a)(2) of the 1940 Act defines ‘‘closed-end

company’’ as ‘‘any management company other

than an open-end company.’’15 U.S.C. 80a–5(a)(1)

and (2).

12 15 U.S.C. 80a–1, et seq.

13 Id.

to, and facilitating transactions in municipal

securities, to remove impediments to and

perfect the mechanism of a free and open

market in municipal securities, and, in

general, to protect investors and the public

interest.

The MSRB represents that the

proposed rule change is intended to

provide relief to underwriters that face

violation of Rule G–36(c)(i) caused by a

delay in delivery by issuers for whom

no concomitant obligations exists to

delivery an official statement by any

particular date. The Commission

believes that because underwriters and

other dealers are still required to adhere

to their continuing obligation under

Rule G–32 to deliver official statements

for new issue municipal securities to

customers by settlement, the MSRB

proposal will foster cooperation among

persons engaged in regulating, clearing,

settling, processing information with

respect to, and facilitating transactions

in municipal securities, without

adversely affecting the protection of

investors and the public interest.

In general, underwriters may be

exposed to a potential violation of Rule

G–36 when an issuer fails to provide the

official statement. The Commission

notes that pursuant to Rule 15c2–

12(b)(3), underwriters are required to

contract to obtain official statements

and thus have an enforceable

mechanism to obtain the official

statements. The Commission also

appreciates the situation of underwriters

who, because an issuer does not provide

a final official statement and is not

required to do so under a 15c2–12

contract, finds themselves in violation

of Rule G–36(c)(i). However, the

Commission expects that an underwriter

that receives an official statement will

provide the official statement to the

Board without delay.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,10 that the

proposed rule change (SR–MSRB–99–

11) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–16210 Filed 6–26–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42965; File No. SR–NASD–

99–74]

Self-Regulatory Organizations; Order

Granting Approval of Proposed Rule

Change as Amended by the National

Association of Securities Dealers, Inc.

Relating To an Exemption From NASD

Conduct Rule 2710 for Closed-End

Management Companies That Make

Periodic Repurchases of Their

Securities Under Rule 23c–3(b) of the

Investment Company Act of 1940

June 20, 2000.

I. Introduction

On December 20, 1999, the National

Association of Securities Dealers, Inc.

(‘‘NAD’’ or ‘‘Association’’), through its

wholly owned subsidiary, NASD

Regulation, Inc. (‘‘NASD Regulation’’),

filed with the Securities and Exchange

Commission (‘‘Commission’’ or ‘‘SEC’’)

a proposed rule change regarding an

exemption from NASD Conduct Rule

2710 (‘‘Corporate Financing Rule’’) for

closed-end management companies that

make periodic repurchases of their

securities under Rule 23c–3(b) 1 of the

Investment Company Act of 1940

(‘‘1940 Act’’) 2 NASD Regulation filed an

amendment to the proposed rule change

on February 29, 2000, which

amendment entirely replaced and

superseded the initial proposal. 3 On

March 20, 2000, NASD Regulation again

amended the proposal.4 The Proposed

rule change, as amended, was published

for comment in the Federal Register on

April 7, 2000.5 The Commission

received one comment letter on the

proposal.6 This order grants approval to

the proposed rule change, as amended.

II. Description of the Proposal

NASD Regulation proposes to amend

the Corporate Financing Rule and NASD

Conduct Rule 2830 to exempt public

offerings by closed-end investment

management companies that make

periodic tender offers for their securities

in compliance with Rule 23c–3(b) 7 of

the 1940 Act 8 from the filing

requirements and limitations on

underwriting compensation of the

Corporate Financing Rule and, instead,

subject such offerings to the sales charge

limitations of NASD Conduct Rule 2830.

The Corporate Financing Rule

regulates the underwriting terms and

other arrangements of public offerings of

securities. Subparagraph (b)(8)(C) of the

Corporate Financing Rule provides that

securities of investment companies

registered under the 1940 Act 9 are

exempt from filing and compliance with

the Corporate Financing Rule, unless

the offerings is of securities of a

management company defined as a

‘‘closed-end’’ company in Section

5(a)(2) of the 1940 Act 10 (‘‘closed-end

funds’’).11 Thus, closed-end funds are

subject to the filing requirements, filing

fees, and regulations of the Corporate

Financing Rule. Open-end investment

companies (‘‘open-end funds’’) are

exempt from filing with NASD

Regulation under the Corporate

Financing Rule. Instead, open-end

funds’ sales charges are regulated under

NASD Conduct Rule 2830.

Closed-end funds are subject to the

core provisions of the 1940 Act 12 that

also apply to open-end funds, including

prohibitions on affiliated transactions,

obligations requiring shareholder

approval of advisory contracts, antipyramiding restrictions, and board

composition requirements. However,

such funds are not subject to other 1940

Act 13 restrictions applicable to openend funds, including certain limitations

on leverage and certain obligations

pertaining to the liquidity of

investments.

The NASD has applied the Corporate

Financing Rule and its predecessor rule

to members’ sales of the securities of

closed-end funds on the basis that

Federal Register / Vol. 65, No. 124 / Tuesday, June 27, 2000 / Notices 39641

14 17 CFR 230.415(a)(1)(xi).

15 15 U.S.C. 77a, et seq.

16 17 CFR 270.23c–3(b).

17 15 U.S.C. 80a–1, et seq.

18 17 CFR 270.23c–3(b)(2)(i).

19 15 U.S.C. 80a–1, et seq.

20 Interval funds are distinguished from other

hybrid closed-end funds that make periodic selftenders in compliance with Rule 13e–4 and

Schedule 13E–4 under the Securities Exchange Act

of 1934 (‘‘tender offer funds’’) (‘‘Exchange Act’’).

See 17 CFR 240.13e–4 and 17 CFR 240.13e–101, et

seq., 15 U.S.C. 78a, et seq. Such tender offer funds

are not required to establish as a fundamental

policy that they will make periodic repurchases, as

required by Rule 23c–3(b)(2)(i) under the 1940 Act.

17 CFR 270.23c–3(b)(2)(i), 15 U.S.C. 80a–1, et seq.

The rule change proposed herein would not exempt

tender offer funds from the Corporate Financing

Rule. However, NASD Regulation will consider

individual requests for exemption under the NASD

Rule 9600 series from the requirements of the

Corporate Financing Rule for such tender offer

funds. See Exemption granted October 29, 1999

under ‘‘Corporate Financing Rule—Rule 2710’’ at

www.nasd.com.

21 17 CFR 270.23c–3(b).

22 17 CFR 270.415(a)(1)(xi).

23 15 U.S.C. 77a, et seq.

24An interval fund that has received a ‘‘no

objections’’ opinion from the Corporate Financing

Department based upon representations that

underwriting compensation will not exceed a

certain amount will become subject to the Sales

Charge Rule upon effectiveness of the proposed

amendments, provided that the compensation limit

has not already been met or exceeded. Any interval

fund that has reached the applicable compensation

limit under the Corporate Financing Rule shall

remain subject to the requirements of the Rule until

the fund files a post-effective amendment with the

Commission registering additional securities.

25See footnote, 4, supra.

26 17 CFR 240.13e–4.

27 17 CFR 240.13e–101. Although the ICI refers to

Schedule 13E–4 in its comment letter, the

Commission notes that Schedule 13E–4 was

removed and reserved, effective January 24, 2000.

See Securities Act Release No. 7760 (October 22,

1999), 64 FR 61408 (November 10, 1999). The

information is now contained in new Schedule TO,

17 CFR 240.14d–100.

28 15 U.S.C. 78a, et seq.

29 17 CFR 270.23c–3

30 Id.

31See ICI Letter at page 2.

32 17 CFR 230.415(a)(1)(xi).

33 Id.

34 Id.

35See ICI Letter on page 2.

closed-end fund offerings are structured

and marketed in a manner that is more

similar to and competitive with

corporate securities offerings than to

open-end funds. At the time the

Corporate Financing Rule was adopted,

closed-end funds conducted offerings of

a fixed number of common shares at

specified times; priced their shares

periodically; limited sales compensation

of broker/dealers to a discount from a

fixed offering price; generally did not

repurchase their securities directly from

shareholders; and generally listed their

securities on a securities market.

Certain closed-end funds, commonly

known as ‘‘interval funds,’’ however,

engage in continuous offerings of their

securities under Rule 415(a)(1)(xi) 14

under the Securities Act of 1933; 15

price their shares daily; pay broker/

dealers initial and continuing

compensation that meets the sales

charge limitations of NASD Conduct

Rule 2830; do not list their securities on

a securities market; and conduct

periodic repurchases in compliance

with Rule 23c–3(b) 16 of the 1940 Act.17

Rule 23c–3(b)(2)(i) 18 requires that the

interval fund establish as a fundamental

policy, changeable only by a majority

vote of the outstanding voting securities

of the company, that it will make

periodic repurchase offers. Because the

shares of interval funds are not

redeemable on a daily basis, they are

classified as ‘‘closed-end’’ under the

1940 Act.19

In Notice to Members 98–81 (October,

1998), NASD Regulation requested

public comment on whether any of the

NASD’s rules are obsolete. One

commenter, the ICI, proposed

exempting interval funds from

regulation by the Corporate Financing

Rule. In addition, the Corporate

Financing Department has received a

rulemaking petition requesting an

exemption from the Corporate

Financing Rule for interval funds.

NASD Regulation believes that the

distribution of interval fund shares is

conducted and financed in a manner

more similar to that used by open-end

funds than the method used by

traditional closed-end funds. Therefore,

the calculation of members’

compensation for the distribution of

interval fund shares is more properly

regulated by provision (d) of NASD

Conduct Rule 2830 (provision (d)

hereinafter, the ‘‘Sales Charge Rule’’),

rather than by the limitations on

underwriting compensation in the

Corporate Financing Rule.

Consequently, NASD Regulation

proposes to amend the Corporate

Financing Rule and NASD Conduct

Rule 2830 to exempt interval funds from

the filing requirements, filing fees, and

regulations of the Corporate Financing

Rule and, instead, to subject them to

NASD Conduct Rule 2830, which

regulates the distribution and sales

charges of open-end funds.20 The

proposed amendment to the Corporate

Financing Rule would amend

subparagraph (b)(8)(C) to provide that

closed-end fund offerings are exempt if

the fund makes periodic repurchase

offers pursuant to Rule 23c–3(b) 21 and

it offers its shares on a continuous basis

pursuant to Rule 415(a)(1)(xi) 22 under

the Securities Act of 1993. 23 Closed-end

funds that do not meet these

requirements will continue to be subject

to the Corporate Financing Rule. The

proposed amendment to NASD Conduct

Rule 2830 would amend paragraph (d)

and (j) to provide that interval funds are

subject to the provisions regulating sales

charges and the repurchases of fund

securities.24

III. Summary of Comments

The Commission received one

comment letter on the proposal from the

ICI.25 While the ICI is generally

supportive of the proposal, the ICI

believes that the proposal does not go

far enough in two respects. First, the ICI

recommends that the exemption from

Corporate Financing Rule be expanded

to include funds that make periodic selftenders in compliance with Rule 13e–

4 26 and Schedule 13E–4 27 under the

Exchange Act.28 The ICI believes that

tender offer funds are substantially

similar to the interval funds that fall

within the scope of the proposal, in that

funds making repurchases of shares

outside of Rule 23c–3 29 also need to

replenish their assets through sales of

additional shares to offset the effects of

repurchases, and therefore may wish to

compensate broker-dealers in the same

manner as interval funds relying on

Rule 23c–3.30 The ICI believes,

therefore, it is irrelevant whether funds

are required to have a fundamental

policy to conduct self-tender offers, and

that the proposal should be expanded to

include tender offer funds.31

Second, the ICI notes that the

proposal, as written, applies only to

interval funds that offer their shares on

a continuous basis pursuant to SEC Rule

415(a)(1)(xi).32 The ICI states, however,

that SEC Rule 415(a)(1)(xi) 33 permits

interval funds to offer shares under the

‘‘shelf registration’’ provisions of the

Act on either a continuous or delayed

basis. To ensure consistency with SEC

Rule 415(a)(1)(xi),34 the ICI believes the

proposal should be modified to include

interval funds that offer their shares on

a delayed basis. The ICI maintains that

interval funds that make offerings on a

delayed basis are also more similar to

open-end funds than closed-end funds,

and therefore should be treated as openend funds.35

In responding to the ICI’s comments,

NASD Regulation stated that its

proposed requirement that the

exemption be made available only for

those closed-end funds that issue

securities on a continuous basis

specifically excluding those interval

funds that offer their shares on a

delayed or periodic basis, was intended

to ensure that the fund’s manner of

financing the distribution of shares

39642 Federal Register / Vol. 65, No. 124 / Tuesday, June 27, 2000 / Notices

36See May 15, 2000 letter from Suzanne E.

Rothwell, Chief Counsel, Corporate Financing,

NASD Regulation to Katherine A. England,

Assistant Director, Division, SEC (‘‘NASD

Regulation Letter’’).

37 Id.

38 Id.

39 Id.

40 15 U.S.C. 78o–3(b)(6).

41 Id.

42 17 CFR 270.23c–3(b).

43 17 CFR 230.415(a)(1)(xi).

44 15 U.S.C. 77a et seq.

45See NASD Regulation Letter at page 2.

46 15 U.S.C. 78s(b)(2).

47 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

would be more similar to the manner of

financing the distribution of shares of

mutual funds that offer shares on a

continuous basis.36 Additionally, NASD

Regulation noted that closed-end funds

that offer their shares on a periodic basis

may decide to finance the distribution

in a manner more similar to corporate

offerings than the broker/dealer

compensation methods used by mutual

funds.37 For these reasons, NASD

Regulation does not believe that the

ICI’s suggested expansion of the scope

of the proposal is warranted.

Additionally, NASD Regulation noted

that, although some tender offer funds

offer their shares continuously and

periodically self-tender, these funds do

not, as a matter of fundamental policy,

establish that they will make periodic

repurchases.38 NASD Regulation

explained that the discretion whether to

make periodic repurchases allows a

tender offer fund the flexibility to

determine if it needs to continuously

offer shares to replenish fund assets.

Were a tender offer fund to decide to

offer shares periodically, however,

NASD Regulation notes that such a fund

could compensate broker/dealers in the

same manner as corporate issuers.39 For

these reasons, NASD Regulation doe not

propose to amend the proposal to

extend the exemption to tender offer

funds.

IV. Discussion

The Commission has reviewed

carefully the NASD’s proposed rule

change and finds, for the reasons set

forth below, the proposal is consistent

with the requirements of the Exchange

Act and the rules and regulations

thereunder applicable to a registered

securities association, and in particular,

with the requirements of Section

15A(b)(6) of the Exchange Act.40

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

Act 41 requires that rules of a registered

securities association be designed to

prevent fraudulent and manipulative

acts and practices, promote just and

equitable principles of trade, and, in

general, protect investors and the public

interest. The proposal would require

that certain closed-end funds known as

‘‘interval funds’’ be regulated by NASD

Conduct Rule 2830(d), rather than by

the limitations on underwriting

compensation in the Corporate

Financing Rule. The Commission agrees

that interval funds, because their

manner of financing the distribution of

shares are more similar to that of openend funds, are more properly regulated

by NASD Conduct Rule 2830, which

regulates the distribution and sales

charges of open-end funds. The

proposal is narrowly construed, in that

the amendment to subparagraph

(b)(8)(C) of the Corporate Financing

Rule would restricted to closed-end

funds that make periodic repurchase

offers pursuant to Rule 23c–3(b) 42 and

offer shares on a continuous basis

pursuant to Rule 415(a)(1)(xi) 43 under

the Securities Act of 1933.44 Closed-end

funds that do not meet these

requirements will continue to be subject

to the Corporate Financing Rule. The

Commission finds that allowing the

requested exemption for funds that meet

these limited criteria is consistent with

the public interest and beneficial to

investors because the distribution of

interval fund shares is conducted and

financed in a manner more similar to

that used by open-end management

investment companies, which are

regulated by NASD Conduct Rule

2830(d).

The Commission has considered

carefully the comments raised by the

ICI, and is not persuaded that the scope

of the proposal should be expanded to

include interval funds that offer their

shares on a periodic basis, nor that the

proposed exemption should be made

available to closed-end funds that

operate as tender offer funds. The

Commission finds that the proposal is

reasonably designed to ensure that the

exemption applies only to funds whose

manner of financing the distribution of

shares is more similar to that of mutual

funds that offer shares on a continuous

basis. The Commission is concerned

that tender offer funds and interval

funds that offer their shares periodically

are marketed, and their distribution

financed, in a manner more akin to

corporate issuers that are subject to the

Corporate Financing Rule. The

Commission therefore believes that the

exemption should not be expanded at

this time to exempt these funds from the

requirements of this rule. The

Commission notes, however, that NASD

Regulation stated that it prefers to gain

experience regarding the financing

structures of tender offer funds through

the exemptive process under the Rule

9600 series, and therefore it will

consider individual requests for

exemption from the requirements of the

Corporate Financing Rule for these

types of funds.45

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,46 that the

proposed rule change (SR–NASD–99–

74), as amended, is hereby approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.47

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–16208 Filed 6–26–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42970; File No. SR–NASD–

00–31]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

National Association of Securities

Dealers, Inc. to Apply Nasdaq’s

Recently Amended Independent

Director and Audit Committee Listing

Requirements to Limited Partnerships

June 21, 2000.

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

Securities Exchange Act of 1934

(‘‘Act’’) 1, and Rule 19b–4 thereunder,2

notice is hereby given that on May 26,

2000, the National Association of

Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’) through its wholly

owned subsidiary, The Nasdaq Stock

Market, Inc. (‘‘Nasdaq’’), filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by Nasdaq. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

Nasdaq has filed with the

Commission a proposed rule change to

apply its recently amended independent

director and audit committee listing

requirements to limited partnerships.

Below is the text of the proposed rule

change. Proposed new language is

italicized and proposed deletions are in

[brackets].

* * * * *