Federal Register / Vol. 62, No. 176 / Thursday, September 11, 1997 / Notices 47857

5 15 U.S.C. 78o–3.

6 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

7The procedures will be available if the parties

voluntarily agree to proceed with an administrative

conference and to develop a written agreement to

proceed under Rule 10334.

8 15 U.S.C. 78s(b)(2).

9 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4. 3 15 U.S.C. 78o–3.

NASD Regulation has found that

parties are deterred from using these

procedures by the extra compensation

paid to arbitrators and the additional

administrative fees required under Rule

10334. At the same time, NASD

Regulation found that one of the most

attractive aspects of Rule 10334 is the

availability of a list selection procedure

for the appointment of arbitrators,

which is not yet generally available for

other types of arbitration cases.

In addition, the attractiveness of the

procedures may be affected by the

required administrative conference with

the staff. This conference may be

beneficial in assisting the parties to

develop a road map for a proceeding,

even if the parties to not agree to use

other procedures under Rule 10334.

However, the requirement that the

administrative conference be conducted

in all cases over $1 million, regardless

of whether the parties plan to proceed

under Rule 10334, creates a cost burden

to the parties and to the Office.

Accordingly, NASD Regulation is

proposing to amend Rule 10334 to

provide for an administrative

conference with the staff only if all

parties request such a conference in

writing. The procedures will be

available if the parties voluntarily agree

to proceed with an administrative

conference and to develop a written

agreement to proceed under Rule 10334.

An administrative conference will,

however, continue to be a prerequisite

to the use of the special procedures

provided by Rule 10334. In addition,

NASD Regulation is proposing to amend

Rule 10334 to extend the Rule for five

more years to August 1, 2002.

III. Discussion

The Commission believes that the

proposed rule change is consistent with

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

the Act 5 in that extending the

effectiveness of the procedures for large

and complex cases and making their use

entirely voluntary will serve the public

interest, by enhancing the satisfaction

and perceived fairness of such

proceedings by the parties to the

proceedings.6 The Commission notes

that providing for a five-year extension

of the pilot program will permit

arbitration participants to continue to

utilize the procedures. In addition, an

extension of the pilot program will

allow the NASD to gather additional

data on the program and to continue to

monitor the usefulness of the large and

complex rule to arbitration parties, in

order to see if the pilot program should

be approved on a permanent basis.

The Commission also believes that

amending Rule 10334 to provide for an

administrative conference with the staff

only if all parties request such a

conference in writing 7 is reasonable

under the Act because the elimination

of the requirement for an administrative

conference in all cases should result in

reduced costs to the parties and to

NASD Regulation. The Commission also

notes that an administrative conference

will continue to be a prerequisite to the

use of the special procedures provided

by Rule 10334.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,8 that the

proposed rule change (SR–NASD–97–

52) is approved, through August 1,

2002.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24135 Filed 9–10–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39021; File No. SR–NASD–

97–45]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Approving

Proposed Rule Change Relating to

Modifications to the Definition of

Qualified Independent Underwriter

September 4, 1997.

I. Introduction

On June 26, 1997, the National

Association of Securities Dealers, Inc.,

(‘‘NASD’’ or ‘‘Association’’) filed with

the Securities and Exchange

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

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

Securities Exchange Act of 1934

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

proposed rule change relating to

modifications to the definition of

‘‘qualified independent underwriter.’’

The proposed rule change was

published for comment in Securities

Exchange Act Release No. 38833 (July

11, 1997), 62 FR 38333 (July 17, 1997).

The Commission received no comments

on the proposal. This order approves the

proposed rule change.

II. Description of the Proposal

NASD is proposing to amend Rule

2720, Distribution of Securities of

Members and Affiliates—Conflicts of

Interest, that regulates the conduct of

offerings by members of their own

securities, those of the member’s parent,

or an affiliate, and other offerings in

which a member has a conflict of

interest.

When a member proposes to

participate in the distribution of a

public offering of its own or an

affiliate’s securities, or of securities of a

company with which it otherwise has a

conflict of interest, NASD Rule 2720

requires that the price at which an

equity issue or the yield at which a debt

issue is to be distributed to the public

be established at a price no higher or a

yield no lower than that recommended

by a member acting as a ‘‘qualified

independent underwriter.’’ The

qualified independent underwriter must

also participate in the preparation of the

offering document and is expected to

exercise the usual standards of due

diligence in respect thereto. The

participation of a qualified independent

underwriter is intended to assure the

public of the independence of the

pricing and due diligence functions in

a situation where a member is

participating in an offering where the

member has a conflict of interest.

The NASD is proposing to delete the

requirement that a qualified

independent underwriter has had net

income from operations of the broker/

dealer entity or from the pro forma

combined operations of predecessor

broker/dealer entities, exclusive of

extraordinary items, as computed in

accordance with generally accepted

accounting principles, in at least three

of the five years immediately preceding

the filing of the registration statement.

III. Discussion

The Commission believes the NASD’s

proposed rule change is consistent with

the Act, and specifically with Section

15A(b)(6) thereunder.3 Section

15A(b)(6) requires that the rules of a

national securities association be

designed to promote just and equitable

principles of trade, to foster cooperation

and coordination with persons engaged

in regulating, clearing, settling,

processing information with respect to,

and facilitating transactions in
47858 Federal Register / Vol. 62, No. 176 / Thursday, September 11, 1997 / Notices

4 In approving this rule, the Commission notes

that it has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

5 15 U.S.C. 78s(b)(2).

6 17 CFR 200.30–3(a)(12).

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

2On August 27, 1997, the NASD Regulation

amended its NTM attached as Exhibit A to this

notice. See letter from Mary N. Revell, Associate

General Counsel, NASD Regulation, Inc., to

Katherine A. England, Assistant Director, Division

of Market Regulation, SEC, dated August 26, 1997.

3The Board of Governors reviewed the proposed

rule change at its meeting on August 7, 1997. See

letter from Mary N. Revell, Assistant General

Counsel, NASD Regulation, Inc., to Katherine A.

England, Assistant Director, Division of Market

Regulation, SEC, dated August 11, 1997.

4See Securities Exchange Act Release No. 37182,

May 9, 1996; 61 FR 24644, May 15, 1996,

(Commission’s interpretation concerning the

delivery of the information through electronic

media in satisfaction of broker-dealer and transfer

agent requirements to deliver information under the

Act and the rules thereunder) (‘‘May 1996

Release’’).

5See Securities Act Release No. 7233, Oct. 6,

1995; 60 FR 53458, Oct. 13, 1995, (Commission’s

interpretation concerning the use of electronic

media as a means of delivering information

required to be disseminated pursuant to the

Securities Act of 1933, the Securities Exchange Act

of 1934, and the Investment Company Act of 1940).

securities, and to remove impediments

to and perfect the mechanism of a free

and open market.4

The NASD is proposing to delete the

eligibility criteria contained in the

definition of ‘‘qualified independent

underwriter’’ in NASD Rule 2720,

which requires a qualified independent

underwriter to have recorded net

income in three of the five years

immediately preceding the offering. Due

to the important investor protections

provided by qualified independent

underwriters, the Commission agrees

with the NASD’s assessment that

qualified independent underwriters

should meet certain standards as

prescribed by the NASD in Rule 2720,

however, the Commission believes the

requirement that a qualified

independent underwriter have had net

income in three of the previous five

years immediately preceding an offering

does not specifically indicate a

member’s ability to act as a qualified

independent underwriter. The

Commission believes that other factors,

including a member’s actual experience

in underwriting, may be more

significant in determining eligibility as

a qualified independent underwriter. In

its proposed rule change, the NASD

noted that the Hearing Subcommittees

of the NADS’s Corporate Financing

Committee have granted the majority of

requests received seeking an exemption

from the proposed qualified

independent underwriter net income

requirement, relying instead, on

members’ extensive underwriting

experience managing or co-managing

public offerings to compensate for any

lack of ongoing profitability.

The Commission recognizes that the

net income requirement, in some

instances, may serve as an effective

measure for qualified independent

underwriters. However, the Commission

also notes that a deficiency in net

income may be the result of various

situations, many of which are not

directly connected to the profitability of

a member’s underwriting activities.

Indeed, in its filing, the NASD noted

that one national broker-dealer failed

the net income requirement due to its

settlement of sales practice abuses in

connection with the distribution of

noncorporate securities, an activity

unrelated to its ability to serve as a

qualified independent underwriter.

The Commission believes that the

participation of a qualified independent

underwriter assures the public of the

independence of the pricing and due

diligence functions in a situation where

a member is participating in an offering

where such member has a conflict of

interest. Because of the important

investor protections provided by

qualified independent underwriters in

such an instance, the Commission

believes certain criteria must be met to

assure the credibility of those acting as

qualified independent underwriters.

The Commission believes the

elimination of the net income

requirement is appropriate, as such

requirement does not appropriately

reflect a member’s ability to act as a

qualified independent underwriter. The

Commission further believes the

remaining standards provided in NASD

Rule 2720 are more relevant in assessing

a member’s qualifications in the

capacity as a qualified independent

underwriter.

IV. Conclusion

For the foregoing reasons, the

Commission finds that the proposed

rule change is consistent with the Act

and the rules and regulations

thereunder applicable to the NASD, and

in particular Section 15A(b)(6).

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,5 that the

proposed rule change (File No. SR–

NASD–97–45) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–24137 Filed 9–10–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39025; File No. SR–NASD–

97–57]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

National Association of Securities

Dealers, Inc. Relating to the Electronic

Delivery of Information Between

Members and Their Customers

September 5, 1997.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

July 30, 1997,2 the National Association

of Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by NASD Regulation, Inc.

(‘‘NASD Regulation’’ or ‘‘NASDR’’).3

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

NASDR has filed a Notice to Members

(‘‘NTM’’) setting forth the policy of

NASDR applicable to the electronic

delivery of information between

members and their customers.

II. Self-Regulatory Organization’s

Statement of the Purpose of and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

NASDR included statements concerning

the purpose of, and basis for, the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. NASDR has prepared

summaries, set forth in Sections A, B,

and C below, of the most significant

aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The Commission, in Release Nos. 34–

37182 4 and 33–723,5 set forth

guidelines establishing a framework

under which broker-dealers and others

may use electronic media as an