[Federal Register Volume 62, Number 198 (Tuesday, October 14, 1997)]
[Notices]
[Pages 53367-53369]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27051]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39197; File No. SR-NASD-97-68]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by National 
Association of Securities Dealers, Inc. Relating to Syndicate Covering 
Transactions and Members' Obligations To Obtain an Underwriting 
Activity Report

October 3, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 8, 1997, the 
National Association of Securities Dealers, Inc. (``NASD'' or 
``Association'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the prposed rule change and on September 
17, 1997, the NASD filed Amendment No. 1. The proposed rule change and 
Amendment No. 1 are described in Items I, II, and III below, which 
Items have been prepared by NASD Regulation, Inc. (``NASD 
Regulation''). The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons. For the 
reasons discussed below, the Commission is granting accelerated 
approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Regulation is proposing to amend NASD Rules 2710, 4624, and 
6540. Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
2700. Securities Distributions
2710. Corporate Financing Rule--Underwriting Terms and Arrangements
(a) Definitions
    No change.
(b) Filing Requirements
(1) through (10)
    No Change.
(11) Request for Underwriting Activity Report
    Notwithstanding the availability of an exemption from filing under 
subparagraph (b)(7) of this Rule, a member acting as a manager (or in a 
similar capacity) of a distribution of a publicly traded subject 
security or reference security that is subject to SEC Rule 101 or an 
``actively-traded'' security under SEC Rule 101 (except for a security 
listed on a national securities exchange) shall submit a request to the 
Corporate Financing Department for an Underwriting Activity Report with 
respect to the subject and/or reference security in order to facilitate 
compliance with SEC Rules 101, 103, or 104, and other distribution-
related Rules of the Association. The request shall be submitted at the 
time a registration statement or similar offering document is filed 
with the Department, the SEC, or other regulatory agency, or, if not 
filed with any regulatory agency, at least two (2) business days prior 
to the commencement of the restricted period under Sec Rule 101. The 
request shall include a copy of the registration statement or similar 
offering document (if not previously submitted pursuant to subparagraph 
(b)(5) of this Rule). If no member is acting as managing underwriting 
of such distribution, each member that is a distribution participant or 
an affiliated purchaser shall submit a request for an Underwriting 
Activity Report, unless another member has assumted responsibility for 
compliance with this subparagraph. For purposes of subparagraphs (b) 
(11) and (12), SEC Rules 100, 101, 103, and 104 are rules of the 
Commission adopted under Regulation M and the following terms shall 
have the meanings as defined in SEC Rule 100: A distribution, A 
distribution participant, A reference security, A restricted period, 
and A subject security.
(12) Submission of Pricing Information
    A member acting as a manager (or in a similar capacity) of a 
distribution [subject to subparagraph (b)(11)] of securities that are 
listed on a national securities exchange and considered a subject 
security or reference security that is subject to SEC Rule 101 or an 
``actively-traded'' security under SEC Rule 101 or a distribution of 
any other securities that are considered ``actively-traded'' under SEC 
Rule 101 shall provide written notice to the Market Regulation 
Department of NASD Regulation, Inc., no later than the close of 
business the day the offering terminates, that includes the date and 
time of the pricing of the offering, the offering price, and the time 
the offering terminated, which notice may be submitted on the 
Underwriting Actvity Report.

(13) Information on Syndicate Covering Transactions

    A member acting as a manager (or in a similar capacity) of a 
distribution of a publicly traded subject security or reference 
security that is subject to SEC Rule 101 or an ``actively-traded'' 
security under SEC Rule 101 shall, no later than thirty (30) days after 
the effective date of the offering, maintain information as required by 
the Corporate Financing Department of NASD Regulation, Inc. on the 
amount of the syndicate short position in a manner consistent with SEC 
Rule 17a-2.\2\
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    \2\ The requirement in Rule 2710(b)(13) will expire no later 
than January 1, 2000.
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(c) Underwriting Compensation and Arrangements
    No change.
4000. The NASDAQ Stock Market
4624. Penalty Bids and Syndicate Covering Transactions
    (a) A market maker acting as a manager (or in a similar capacity) 
of a distribution of a Nasdaq security that is a subject or reference 
security under SEC Rule 101 shall provide written notice to the 
Corporate Financing Department of NASD Regulation, Inc. of its 
intention to impose a penalty bid on syndicate members or to conduct 
syndicate covering transactions pursuant to SEC Rule 104 prior to 
imposing the penalty bid or engaging in the first syndicate covering 
transaction. A market maker that intends to impose a penalty bid on 
syndicate members may request that its quotation be identified as a 
penalty bid on Nasdaq pursuant to paragraph (c) below.
    (b) The notice required by paragraph (a) shall include:
    (1) The identity of the security and its Nasdaq symbol;
    (2) The date the member is intending to impose the penalty bid and/
or conduct syndicate covering transactions[; and

[[Page 53368]]

    (3) The amount of the syndicate short position, in the case of 
syndicate covering transactions]
    (c) Notwithstanding paragraph (a), a market maker may request that 
its quotation be identified as a penalty bid on Nasdaq [display] by 
providing notice to Nasdaq Market Operations, which notice shall 
include the date and time that the penalty bid identified should be 
entered on Nasdaq and, if not in writing, shall be confirmed in writing 
no later than the close of business the day the penalty bid identified 
is entered on Nasdaq.
    (d) The written notice required by [paragraphs (a) and (c) of] this 
Rule may be submitted on the Underwriting Activity Report [by including 
the information required by subparagraphs (b)(1) and (b)(2) or 
paragraph (c)].
6500. OTC Bulletin Board Service
6540. Requirements Applicable to Market Makers
    (a) No change.
    (b) No change.
    (1) Permissible Quotation Entries.
    (A)-(C)--No change.
    (D) Any member that intends to be a distribution participant in a 
distribution of securities subject to SEC Rule 101, or is an affiliated 
purchaser in such distribution, and is entering quotations in an OTCBB-
eligible security that is the subject security or reference security of 
such distribution shall, unless another member has assumed 
responsibility for compliance with this paragraph:
    (i) No change.
    (ii) No change.
    (iii) provide written notice to the Corporate Financing Department 
of NASD Regulation, Inc. of its intention to impose a penalty bid or to 
conduct syndicate covering transactions pursuant to SEC Rule 104 prior 
to imposing the penalty bid or engaging in the first syndicate covering 
transaction. Such notice shall include information as to the date the 
penalty bid or first syndicate covering transaction will occur [and the 
amount of the syndicate short position]; and
    (iv) No change.
    (E) The written notice required by subparagraphs (b)(1)(D) (i), 
(iii) and (iv) of this rule may be submitted on the Underwriting 
Activity Report provided by the Corporate Financing Department of NASD 
Regulation, Inc. [by including the information required by those 
subparagraphs.]
    (F) No change.
    (2) through (4) No change.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD Regulation 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 III below. NASD Regulation 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

    On April 1, 1997, NASD Rules designed to facilitate compliance with 
the SEC's Regulation M became effective.\3\ Rule 104 of Regulation M 
requires members acting as managing underwriters to notify the 
appropriate regulator of the market for the security in distribution of 
a member's intention to engage in syndicate short covering 
transactions. It is the understanding of NASD Regulation staff that the 
purpose of this requirement is to establish a database at the regulator 
of those offerings in which syndicate short covering transactions may 
have been conducted, thereby facilitating a study of syndicate short 
covering practices by the staff of the SEC. Because the Association has 
traditionally been responsible for regulating the permissible amount of 
over-allotment options that may be utilized to cover syndicate short 
positions in public offerings, NASD Regulation believes that the 
Association has a long-standing interest in developing information to 
assist it and the SEC in the regulation of the over-allotment process.
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    \3\ Securities Exchange Act Release No. 38360 (March 4, 1997), 
and amended Securities Exchange Act Release No. 38399 (March 14, 
1997).
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    To allow NASD members to comply with their notification obligations 
under Rule 104, NASD Regulation developed a standardized form 
designated as the Regulation M Trading Notification. Both NASD Rule 
4624 regarding The Nasdaq Stock Market and NASD Rule 6540 regarding the 
OTC Bulletin Board Service require that members include the amount of 
the syndicate short position on the Regulation M Trading Notification. 
This latter information is not required to be provided under SEC Rule 
104 of Regulation M.
    Members of the industry have expressed concern regarding their 
ability to provide accurate data on the amount of a syndicate short 
position at the time the Regulation M Trading Notification is required 
to be submitted i.e., prior to the first syndicate covering 
transaction. At that time, the member cannot generally provide accurate 
information as to the total amount of the syndicate short position.
    While NASD Regulation believes it important to be able to collect 
accurate information on the amount of the syndicate short position in 
order to assist the SEC in its study of syndicate short covering 
activities, such information need not be immediately provided to the 
Association. In order to address the concerns of the industry, NASD 
Regulation is proposing to amend NASD Rule 4624 and NASD Rule 6540 to 
delete the current requirement to provide immediate information on the 
amount of syndicate short positions. In its place, NASD Regulation is 
proposing to amend Rule 2710, the Corporate Financing Rule, to 
establish a new requirement in Subparagraph (b)(13) that, no later than 
30 days after the effective date of the offering, the managing 
underwriter shall maintain information as required by the Corporate 
Financing Department of NASD Regulation, Inc. on the amount of the 
syndicate short position and that such information be retained in the 
same manner as the managing underwriter's syndicate covering 
transaction records under SEC Rule 17a-2. Rule 17a-2 requires that a 
managing underwriter separately maintain information on stabilizing 
transactions and syndicate covering transactions. It is anticipated 
that the managing underwriter will maintain with its records of 
syndicate covering transactions, as required by Rule 17a-2, a record of 
the amount of the syndicate short position. NASD Regulation intends to 
require that the information to be retained by the managing underwriter 
consist of whether the syndicate short position was no greater than the 
over-allotment option, or whether a naked short position was less than 
1%, between 1% and 5%, between 5% and 10%, or over 10% of the offering 
size. The proposed change to NASD Rule 2710 includes a sunset provision 
to eliminate the requirement to retain information on the amount of 
syndicate short positions at the conclusion of the study of syndicate 
short covering practices, but no later than January 1, 2000.
    In addition, NASD Regulation is proposing to amend Subparagraph 
(b)(11) of Rule 2710 to conform its rule language to that of 
Subparagraph (b)(12) and to the Association's original intent

[[Page 53369]]

regarding the scope of that provision. The proposed rule change would 
clarify that the managing underwriter is required to request an 
Underwriting Activity Report with respect to a distribution of a 
security that is considered an ``actively-traded'' security under SEC 
Rule 101.\4\ Currently, the language of Subparagraph (b)(11) is 
misleading in that it only imposes this requirement with respect to 
subject or reference securities that are ``subject to SEC Rule 101.'' 
Because ``actively-traded'' securities are exempt from SEC Rule 101, 
they are not considered ``subject to'' SEC Rule 101. In Notice to 
Members 97-10 (March 1997), announcing adoption of the amendments of 
the NASD to implement Regulation M, the NASD stated that the 
Underwriting Activity Report'' will indicate whether the security 
qualifies under SEC Rule 101 as an actively-traded security or for the 
one-day or five-day restricted periods.'' Thus, the proposed change to 
Subparagraph (b)(11) will make the rule language consistent with the 
Association's requirement that the managing underwriter request an 
Underwriting Activity Report for securities that are considered 
``actively-traded'' under SEC Rule 101.
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    \4\ An ``actively-traded'' security is a subject or reference 
security with a value of average daily trading volume of at least $1 
million, which is issued by an issuer whose common equity securities 
have a public float of at least $150 million.
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    Moreover, NASD Regulation is proposing to amend Subparagraph 
(b)(11) to exclude exchange-listed securities from the requirement that 
the managing underwriter obtain an Underwriting Activity Report. 
Originally, it had been anticipated that the managing underwriter would 
be provided information on the value of average daily trading volume 
and market value of public float with respect to exchange-listed 
securities, in addition to securities included in The Nasdaq Stock 
Market, Inc. or quoted on the OTC Bulletin Board Service. However, 
since this information has not been available, the proposed rule change 
would eliminate the obligation of managing underwriters to request the 
Underwriting Activity Report with respect to exchange-listed 
securities. The managing underwriter of an offering of exchange-listed 
securities would, nonetheless, continue to be responsible under 
Subparagraph (b)(12) to advise the Market Regulation Department of 
information regarding the pricing and termination of the offering. 
Conforming amendments are made to Subparagraph (b)(12) in light of this 
proposed change to Subparagraph (b)(11). Finally, Subparagraph (b)(12) 
is also proposed to be revised to clarify that the managing underwriter 
of any offering of securities considered ``actively-traded'' under SEC 
Rule 101 must also advise the Market Regulation Department of 
information on pricing and termination.
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(2) \5\ of the Act in that the proposed 
rule change will enforce and facilitate compliance by NASD members with 
the requirements of SEC Regulation M.
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    \5\ 15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD Regulation does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to the file number in the caption 
above and should be submitted by November 4, 1997.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    The Commission finds that the NASD's proposal is consistent with 
the Act and the rules and regulations thereunder applicable to a 
registered national securities association. Specifically, the 
provisions of Section 15A(b)(2) of the Act which requires that an 
association enforce compliance with Securities Exchange Act Rules in 
addition to the rules of the association. The Commission believes that 
the proposal will enforce and facilitate compliance by NASD members 
with the requirements of Regulation M, SEC Rules 100 through 105.
    In addition, the Commission finds that the NASD's proposal is 
consistent with the provisions of Section 15A(b)(6) of the Act which 
requires, in part, that an association have rules that are designed to 
prevent fraudulent and manipulative acts and practices, promote just 
and equitable principals of trade, and in general, to protect 
investors. In approving this proposed rule change, the Commission notes 
that it has also considered the proposal's impact on efficiency, 
competition, and capital formation.\6\
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    \6\ 15 U.S.C. 78c(f).
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    The Commission, therefore, finds good cause for approving the 
proposed rule change prior to the thirtieth day after the date of 
publication of filing thereof in the Federal Register.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change, SR-NASD-97-68, be, and hereby 
is, approved.

    \7\ 17 U.S.C. 78s(B)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(2).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27051 Filed 10-10-97; 8:45 am]
BILLING CODE 8010-01-M