59928 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Notices

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

2 17 CFR 240.19b–4.

3 In Amendment No. 1, the NASD amended Rule

2710(b)(7)(F)(i) to replace the phrase ‘‘listed on the

Nasdaq National Market, the New York Stock

Exchange, or American Stock Exchange’’ with

‘‘designated as a Nasdaq National Market security

or listed on the New York Stock Exchange or

American Stock Exchange.’’ Letter from Suzanne E.

Rothwell, Chief Counsel, Corporate Financing,

NASD Regulation, to Kathy England, Assistant

Director, Division of Market Regulation, SEC (June

18, 1997).

4 17 CFR 240.13e–3.

5See Notice to Members 95–73 (September 1995)

(‘‘NTM 95–73’’). A copy of NTM 95–73 was

submitted as Exhibit 2 to the NASD’s proposal and

is available for inspection and copying in the

Commission’s Public Reference Room.

202/408–6839, E-mail:

‘‘infopcsd@aol.com’’.

Contact: Paul Flaim, Administrative

Assistant, at 202/408–5296.

Sign Language Interpreter: Please call

the contact if you will need a sign

language interpreter.

Martin A. Spitzer,

Executive Director, President’s Council on

Sustainable Development.

[FR Doc. 97–29288 Filed 11–4–97; 8:45 am]

BILLING CODE 3125–01–P

SECURITIES AND EXCHANGE

COMMISSION

[File No. 500–1]

Orlando Super Card, Inc.; Order of

Suspension of Trading

November 3, 1997.

It appears to the Securities and

Exchange Commission that there is a

lack of current and accurate information

concerning the securities of Orlando

Super Card, Inc. (‘‘Orlando Super

Card’’) because of questions regarding

(1) the trading and true value of the

common stock of Orlando Super Card;

and (2) the accuracy and adequacy of

publicly disseminated information

concerning Orlando Super Card’s

financial prospects.

The Commission is of the opinion that

the public interest and the protection of

investors require a suspension of trading

in the securities of the above-listed

company.

Therefore, it is ordered, pursuant to

Section 12(k) of the Securities Exchange

Act of 1934, that trading in the abovelisted company is suspended for the

period from 9:30 a.m. EST, November 3,

1997 through 11:59 p.m. EST, on

November 14, 1997.

By the Commission.

Jonathan G. Katz,

Secretary.

[FR Doc. 97–29353 Filed 11–3–97; 11:15 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39284; File No. SR–NASD–

97–38]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Granting Approval

to Proposed Rule Change, and

Amendment No. 1 thereto, Relating to

the Application of the NASD Corporate

Financing Requirements To Exchange

Offers, Mergers and Acquisitions, and

Other Similar Transactions

October 29, 1997.

On May 23, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) submitted

to the Securities and Exchange

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

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 to clarify the

application of Rules 2710 and 2720 to

exchange offers, merger and acquisition

transactions, and other similar corporate

reorganizations. On June 19, 1997, the

NASD submitted Amendment No. 1 to

the proposed rule change.3

The proposed rule change and

Amendment No. 1 were published for

comment in Securities Exchange Act

Release No. 38822 (July 8, 1997), 62 FR

38150 (July 16, 1997). No comments

were received on the proposal. This

order approves the proposed rule

change as amended.

I. Introduction

Rule 2710 of the Conduct Rules of the

NASD (‘‘Corporate Financing Rule’’)

requires that members file with the

Corporate Financing Department of the

NASD public offerings of securities for

review of the proposed underwriting

terms and arrangements, which terms

and arrangements must comply with

that rule. Rule 2720 of the Conduct

Rules (‘‘Conflicts Rule’’) establishes

standards in addition to those in Rule

2710 to address the conflicts-of-interest

that occur in connection with a public

offering of the securities of a member,

the parent of a member, an affiliate of

a member, or other issuer with whom

the member has a conflict-of-interest.

For an offering to be subject to filing

under the Corporate Financing and

Conflicts Rules, a member must be

considered to be ‘‘participating’’ in the

offering and the offering must be one

that is subject to the filing requirements.

Paragraph (a)(5) of Rule 2710 defines

‘‘participation or participating in a

public offering’’ to include participation

in the preparation of the offering or

other documents, participation in the

distribution of the offering on an

underwritten, non-underwritten, or any

other basis, furnishing of customer and/

or broker lists for solicitation, or

participation in any advisory or

consulting capacity to the issuer related

to the offering, but not the preparation

of an appraisal in a savings and loan

conversion or a bank offering or the

preparation of a fairness opinion

pursuant to Rule 13e–3 under the Act.4

With respect to offerings subject to

compliance with the Rules, the

Corporate Financing and Conflict Rules

apply to most ‘‘public offerings’’ of

securities, which is defined in Rule

2720(b)(14) to include, among other

things, ‘‘offerings made pursuant to a

merger or acquisition.’’ Neither the

Corporate Financing Rule nor the

Conflicts Rule currently identifies the

types of mergers and acquisitions

subject to filing and compliance with

those rules. The NASD has, therefore,

determined to amend Rules 2710 and

2720 to clarify the application of the

requirements of the Corporate Financing

and Conflicts Rules to exchange offers,

mergers and acquisitions, and similar

corporate reorganizations and make

other related amendments. In view of

the increasing amount of merger and

acquisition activity, the NASD believes

that the proposed amendments to Rule

2710 and 2720 will provide certainty

and eliminate confusion regarding their

application to such transactions.

With respect to the time-sensitive

nature of many mergers and

acquisitions, exchange offers, and

similar corporate reorganizations that

would become subject to filing as a

result of approval of the proposed rule

change, the NASD previously

announced a policy to expedite the

review of such offerings by the

Corporate Financing Department.5 In

general, it is anticipated that a comment

letter will be issued by the Corporate

Financing Department of the NASD

within 48 hours of receipt of the filing
Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Notices 59929

6 15 U.S.C. 77c(a)(4), 77c(a)(9), and 77c(a)(11).

7 In this context, the term ‘‘exchange offer’’ is

intended to refer to transactions where one security

is issued in exchange for another security of the

issuer or another entity, and is distinguished from

mergers, acquisitions and other corporate

reorganizations (except if accomplished through an

exchange offer) registered on a Form S–4 or F–4.

8The concept of ‘‘solicitation’’ in rules 2710 and

2720 is different than in Section 3(a)(9) of the

Securities Act. For example, activities by a broker/

dealer that would not be ‘‘soliciting’’ for purposes

of Section 3(a)(9) may nonetheless come within the

concept of ‘‘solicitation’’ for purposes of the

requirement to file an offering with NASD

Regulation for review under Rules 2710 and 2720.

See applicable SEC no-action letters on Section

3(a)(9). Further, the application of the filing

requirements of Rule 2710 does not depend upon

whether remuneration is paid to the member. Thus,

regardless of whether a member is paid for

soliciting the exchange, an exchange offer would be

subject to filing if the member engages in

solicitation activities as described in this rule filing.

9See 15 U.S.C. 3(a)(5), 3(a)(6), 3(a)(10), and

3(a)(12).

10See Securities Exchange Act Rel. No. 29354

(June 21, 1991), 56 FR 30036 (July 1, 1991); and

Notice to Members 93–88 (December 1993), which

includes a copy of Forms S–3 and F–3 as those

Forms existed prior to October 21, 1992 and Form

F–10 as approved by the SEC on June 21, 1991.

of the documents related to such a

transaction, so long as the

documentation and related information

submitted meet the requirements set

forth in subparagraphs (b) (5) and (6) of

Rule 2710 and the appropriate filing fee

is included.

II. Description of the Proposal

The NASD is proposing to amend the

Corporate Financing and Conflicts Rules

to clarify their application to exchange

offers, merger and acquisition

transactions, and other similar corporate

reorganizations and make other related

changes. The amendments limit the

application of the rules to narrow

situations where pre-offering review

under the Corporate Financing Rule or

the application of the Conflicts Rule is

believed necessary to protect investors.

Thus, in general, an exchange offer will

be subject to the Conflicts Rule and

required to be filed with the Corporate

Financing Department for review when

a member is participating in solicitation

activities related to an offer involving

securities that are exempt from SEC

registration. In addition, exchange

offers, merger and acquisition

transactions, and other similar corporate

reorganizations will be subject to the

Conflicts Rule, and required to be filed

for review, if there is an issuance of

securities that results in the direct or

indirect public ownership of a member.

Description of Proposed Rule Change to

Rule 2710

The filing requirements of the

Corporate Financing Rule subject an

offering to compliance with that rule

and, if the offering consists of securities

issued by a member, the parent of a

member, an affiliate of a member, or an

issuer with which the member has a

conflict-of-interest (as that latter term is

defined in Rule 2720), to compliance

with the Conflicts rule. Paragraph (b)(9)

of Rule 2710 is intended to provide

clarification of certain types of public

offerings required to be filed with the

Corporate Financing Department of the

NASD for review. Paragraph (b)(9) is

proposed to be amended to add new

subparagraph (H) that would require the

filing of exchange offers exempt from

registration under Sections 3(a)(4),

3(a)(9), and 3(a)(11) of the Securities Act

of 1933 (‘‘Securities Act’’),6 where the

member engages in active solicitation,

and exchange offers registered with the

Commission if a member acts as a dealer

manager.7 Active solicitation occurs

when a member directly solicits or

contacts securityholders, acts as a dealer

manager, performs tasks that are

performed by investor relations firms

(i.e., contacts securityholders to

determine the action they intend to

take), contacts securityholders to

determine whether they have received

the offering materials, answers

unsolicited contacts, and participates in

meetings with securityholders or their

advisors before or after an exchange

offer begins.8 In contrast, active

solicitation does not encompass the

delivery of a ‘‘fairness opinion,’’ advice

as to the structure and terms of the

exchange offer, assistance in the

preparation of the offering documents to

be sent to securityholders, nor any other

functions that do not involve direct

solicitation or direct contact with

securityholders.

The NASD is not extending the filing

requirement to other public exchange

offers exempt from registration because

such offerings are either subject to the

oversight of a court or of another review

authority, such as the Comptroller of the

Currency or the Federal Deposit

Insurance Corporation.9

With respect to exchange offers

registered on Forms S–4 or F–4, filing is

expressly limited to those distributions

where the member is engaged by the

company to act as dealer manager and

solicits consents on behalf of the

company to the proposed reorganization

and to otherwise facilitate the exchange

of securities. In such exchange offers,

the member generally acts as a financial

advisor to help structure the transaction

and will receive a fee, as well as

distribution-related compensation for

services rendered.

To the extent an exchange offer

exempt under Sections 3(a) (4), (9), and

(11) of the Securities Act or registered

with the SEC does not fall within the

filing requirement in new subparagraph

(b)(9)(H) to Rule 2710 because the

member is not engaging in solicitation

activities or is not acting as dealer

manager, respectively, the exchange

offer is considered exempt from

compliance with the Corporate

Financing and Conflicts Rules because

the member is not considered to be

‘‘participating in the offering.’’

The NASD, however, is also

proposing to add subparagraph (b)(7)(F)

to Rule 2710 to exempt from filing

exchange offers where the securities to

be issued or the securities of the

company to be acquired are designated

as a Nasdaq National Market security or

listed on the New York Stock Exchange

(‘‘NYSE’’) or American Stock Exchange

(‘‘Amex’’) or where the company issuing

securities qualifies to register securities

on SEC Registration Form S–3, F–3 or

F–10.

The exemption for companies

qualified to register securities on SEC

Registration Form S–3, F–3, or F–10

applies to those companies that meet

the standards for the Forms in

subparagraphs (C) (i) and (ii) of

paragraph (b)(7) of Rule 2710 in order to

restrict the exemption to domestic

companies that meet the standards for

Forms S–3 and F–3 prior to October 21,

1992 and to Canadian-incorporated

foreign private issuers that meet the

standards for Form F–10 approved in

Release No. 34–29354.10 This provision

would require, in general, that a

domestic company have a three-year

history as a public reporting company,

and be in compliance with the current

year’s periodic reporting requirements

of the Act (with respect to the timely

filing of Forms 10–Qs and 10–Ks). In

addition, the minimum required market

value of a company’s common stock

must be as follows: Form S–3, $150

million (or $100 million market value of

voting stock and three million shares

annual trading volume); and Form F–3,

$300 million held world-wide. For Form

F–10, Canadian private issuers must

have (CN) $360 aggregate value of voting

stock and a public float of (CN) $754

million.

Paragraph (b)(7) of the Corporate

Financing Rule, which includes the two

filing exemptions for exchange offers

discussed above, lists those public

offerings not required to be filed for

review with the Corporate Financing

Department. However, the underwriting

terms and arrangements of such exempt

offerings must be in compliance with

the requirements of Rule 2710 or 2810,
59930 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Notices

11See infra note 14.

12This latter filing requirement does not, it is

important to note, require the filing of exchange

offers, mergers, acquisitions, and corporate

reorganizations involving an offering of securities of

an affiliate of a member other than a parent or of

an issuer that otherwise has a conflict-of-interest

with a member.

13Paragraph (n) of Rule 2720 provides that all

offerings of securities included within the scope of

that Rule are also subject to the provisions of Rule

2710, even though an exemption from filing may be

available under Rule 2720.

14See Notice to Members 88–100 (December

1988). In that notice, the Association expressed its

special concerns regarding the merger of blank

check companies in the penny stock market with

privately held holding companies of members,

indirectly creating a publicly-held NASD member

without having to comply with Rule 2720.

as applicable. Moreover, any offering

exempt from filing under paragraph

(b)(7) must nonetheless be filed if the

offering is subject to Rule 2720, the

Conflicts Rule, and is subject to review

by the Corporate Financing Department

for compliance with Rules 2710 and

2720.11

Paragraph (b)(9) of the Corporate

Financing Rule is also proposed to be

amended to add subparagraph (I) to

require the filing of any exchange offer,

merger or acquisition transaction, and

similar corporate reorganization that

involves an issuance of securities that

results in the direct or indirect public

ownership of a member.12 Such

offerings would be subject to

compliance with Rule 2710 and Rule

2720.13 The NASD has long held the

view that pre-offering review is vital to

protect investors when the member and

the issuer are in a control relationship

that is addressed through the

application of Rule 2720. The NASD has

previously clarified that mergers or

acquisitions involving an issuer and a

member or its parent that result in the

direct or indirect public ownership of a

member are subject to compliance with

Rule 2720, regardless of whether the

merger or acquisition occurs subsequent

to the issuer’s initial public offering.14

Paragraph (b)(8) of Rule 2710 lists

those offerings that, although within the

definition of ‘‘public offering,’’ are

exempted from compliance with Rule

2710 and 2720. The NASD is proposing

to add subparagraphs (I) and (J) to

paragraph (b)(8) to provide an

exemption from filing and compliance

with Rules 2710 and 2720 for:

1. Spin-off and reverse spin-off

transactions involving a subsidiary or

affiliate of the issuer, where the

securities are issued as a dividend or

distribution to current shareholders; and

2. Securities registered with the SEC

in connection with a merger,

acquisition, or other similar business

combination, except if the offering

would be filed under subparagraph

(b)(9)(I), described above, because it

involves a transaction that results in the

direct or indirect public ownership of a

member.

In addition, the NASD is proposing to

add subparagraph (c)(6)(B)(v) to Rule

2710 to provide that it is an

unreasonable term and arrangement for

a member to receive a right to receive

a ‘‘tail fee’ arrangement that has a

duration of more than two years from

the date the member’s services are

terminated, in the event an offering is

not completed and the issuer

subsequently consummates a similar

transaction. Such arrangements are

currently only provided in connection

with exchange offers. It is believed that

the real benefit derived by a company

that grants a ‘‘tail fee’ arrangement is the

creativity of the strategic advice given

by the member for the particular

transaction that may include, among

other things, assisting the company in

defining objectives, performing

valuation analyses, formulating

restructuring alternatives, and

structuring the offering. In particular, in

the case of an exchange offer, a member

providing financial advance will

generally have provided considerable

ongoing financial advisory services to

the company.

The proposed ‘‘tail fee’’ prohibition

also, however, would permit a member

to demonstrate on the basis of

information satisfactory to the NASD

that an arrangement of more than two

years is not unfair or unreasonable

under the circumstances. The ability of

the staff of the Corporate Financing

Department to grant exceptions upon

request is intended to be used where the

member can demonstrate that the

creativity of the strategic advice

provided by the member has a potential

benefit to the company for more than

two years. In the case of exchange offers

exempt from filing but subject to

compliance with the Rule under

subparagraph (b)(7)(F), where the ‘‘tail

fee’’ arrangement is proposed to have a

duration of longer than two years, a

member would be required to request an

opinion of the staff as to whether the

arrangement is permissible under the

Rule. In the case of any other offering

exempt from filing under subparagraph

(b)(7), a member is required to request

an opinion of the staff as to whether it

has ‘‘no objections’’ as to any proposed

‘‘tail fee’’ arrangement.

As set forth above, although ‘‘tail fee’’

arrangements are currently granted only

in connection with exchange offers, the

provision is written to regulate such an

arrangement in connection with any

type of public offering subject to

compliance with the Corporate

Financing Rule. Where a ‘‘tail fee’’

arrangement is proposed in connection

with public offerings that are not

exchange offers, the NASD staff will

consider whether the arrangement is

justified by the services provided by the

member to the issuer. Where the

member does not appear to have

provided the type of substantial

structuring and/or advisory services to

the issuer similar to those that are

described above, other than those

services traditionally provided in

connection with a distribution of a

public offering, a proposed ‘‘tail fee’’

arrangement will be considered to be

unfair and unreasonable on the basis

that the arrangement would violate Rule

2110 (the Association’s basic ethical

rule) and Rule 2430 since the member

is proposing to be paid for services that

the member has not provided to the

issuer. This position is consistent with

subparagraph (c)(6)(B)(iv) of Rule 2710,

which prohibits a member from

receiving compensation in connection

with an offering of securities that is not

completed, except for compensation

received in connection with a

transaction (i.e., a merger transaction)

that occurs in lieu of the proposed

offering as a result of the member’s

efforts and the reimbursement of the

member’s reasonable out-of-pocket

accountable expenses.

Description of Proposed Rule Change to

Rule 2720

The NASD is proposing to amend the

Conflicts Rule to conform the scope

section of the Rule to the amendments

to the filing requirements of Rule 2710

and to clarify the responsibilities of a

qualified independent underwriter in an

exchange offer subject to compliance

with rule 2720. Paragraph (a) of Rule

2720 is proposed to be amended to add

subparagraph (3) to provide that in the

case of an exchange offer, merger and

acquisition transaction, or similar

corporate reorganization, compliance

with Rule 2720 is required only if the

offering comes within subparagraph

(b)(9)(h) of Rule 2710, where the

issuance of securities is by a member or

the parent of a member or if the offering

comes within subparagraph (b)(9)(I). As

set forth above, proposed subparagraph

(b)(9)(H) would require the filing of

exchange offers exempt under Section

3(a)(4), 3(a)(9), and 3(a)(11) of the

Securities Act, if the member’s

participation involves active solicitation

activities, and of exchange offers

registered with the SEC, if the member

is acting as dealer manager. Thus, the

exemption from filing for such exchange

offers provided by proposed
Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Notices 59931

15See supra note 13.

16This filing requirement is consistent with the

position announced in Notice to Members 88–100

(December 1988) and paragraph (i) of Rule 2720

which states: ‘‘* * * if an issuer proposes to engage

in any offering which results in the public

ownership of a member * * * the offering shall be

subject to the provisions of this Rule to the same

extent as if the transaction had occurred prior to the

filing of the offering.’’

17A member must meet a number of requirements

in order to be qualified independent underwriter

under subparagraph (b)(15) of Rule 2720, including

the requirement that the member ‘‘has agreed in

acting as a qualified independent underwriter to

undertake the legal responsibilities and liabilities of

an underwriter under the Securities Act of 1933,

specifically including those inherent in Section 11

thereof.’’ Participation of a qualified independent

underwriter is not required by Rule 2720 if the

offering is of equity securities that meet the test of

having a ‘‘bona fide independent market’’ or is of

debt that is rated investment grade.

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

19 In approving this rule change, the Commission

has considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

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

20 15 U.S.C. 77c(a)(4), 77c(a)(9), and 77c(a)(11).

21 It should be noted, however, that where a spinoff is followed by a traditional public offering by

the spun-off company to raise capital, the

company’s initial public offering would be subject

to the Corporate Financing Rule’s filing

requirements and to compliance with Rule 2720.

This analysis would require the filing of any public

offering to raise capital that follows a merger,

acquisition, exchange offer or other corporate

reorganization that would be exempt from filing

under Rule 2710 or exempt from compliance with

Rules 2710 and 2720. In the latter case, the offering

may fall within another exemption from filing, such

as the filing exemptions provided by subparagraphs

(b)(7) (A), (C) or (D) of Rule 2710.

subparagraph (b)(7)(F), where the

securities are designated as a Nasdaq

National Market security or listed on the

NYSE or Amex or the issuer qualifies to

register the securities on Form S–3, F–

3, or F–10, is not available if the

exchange offer is by a member or parent

of a member.15 As further set forth

above, proposed subparagraph(b)(9)(I)

would require the filing of any exchange

offer, merger and acquisition

transaction, or similar corporate

reorganization involving an issuance of

securities that results in the direct or

indirect public ownership of a

member.16

The NASD is also proposing to amend

Rule 2720 to clarify the obligations of a

qualified independent underwriter 17

that would be required by subparagraph

(c)(3) of Rule 2720 to perform due

diligence with respect to the offering

document and provide a

recommendation with respect to the

exchange value of an exchange offer,

merger and acquisition transaction, or

similar corporate reorganization.

Currently, the Conflicts Rule 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 yield

no lower than that recommended by a

qualified independent underwriter (who

shall also participate in the preparation

of the registration statement and shall

exercise the usual standards of ‘‘due

diligence’’ in respect thereto). The

NASD is proposing to amend

subparagraph (c)(3)(A) of Rule 2720 by

adding a new exception to state that in

any exchange offer, merger and

acquisition transaction or corporate

reorganization subject to Rule 2720, the

provision which requires that the price

or yield of the securities be established

based on the recommendation of a

qualified independent underwriter shall

not apply and instead, the exchange

value of the securities being offered in

the transaction shall not be less than

that recommended by a qualified

independent underwriter.

Finally, in order to make clear that the

offerings that are exempt under

subparagraph (b)(8) of Rule 2710 (that

include exemptions for offerings of

securities issued in a spin-off or in a

merger registered with the SEC on Form

S–4 or F–4) are also exempt from Rule

2720, paragraph (o) of Rule 2720 is

being amended to reference the

exemptions from Rule 2720 that are

provided in subparagraph (b)(8) of Rule

2710.

III. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to the Association, and, in

particular, with the requirements of

Section 15A(b) of the Act.18 Among

other things, Section 15A(b)(6) of the

Act requires that the rules of a national

securities association be designed to

foster cooperation and coordination

with persons engaged in regulation,

clearing, settling, processing

information with respect to, and

facilitating transactions in securities, to

remove impediments to and perfect the

mechanism of a free and open market

and a national market system, and in

general, to protect investors and the

public interest.19

Specifically, the Commission believes

that the proposed amendments to Rules

2710 and 2720 should reduce confusion

regarding the application of the NASD’s

Corporate Financing and Conflicts Rules

to exchange offers, mergers and

acquisitions, and other similar corporate

reorganizations. The Commission

supports efforts by the NASD to

streamline the process for participation

by members in public offerings by

clarifying when pre-offering review is

necessary and in the public interest.

A. Amendment to Rule 2710

The Commission believes that it is

appropriate to amend Rule 2710 to

require filing of exchange offers exempt

from registration under Sections 3(a)(4),

3(a)(9), and 3(a)(11) of the Securities

Act,20 where the member engages in

active solicitation, and exchange offers

registered with the Commission if a

member acts as a dealer manager. When

a member actively solicits

securityholders with respect to

exempted exchange offers, or acts as a

dealer manager with respect to exchange

offers registered on Form S–4 or F–4,

pre-offering review is necessary to

prevent fraudulent and manipulative

acts and practices, and protect investors.

The Commission believes that it is

appropriate to amend Rule 2710 to

exempt from filing exchange offers

where securities to be issued or the

securities of the company to be acquired

are designated as a Nasdaq National

Market security or listed on the NYSE

or Amex or where the company issuing

securities qualifies to register securities

on SEC registration Form S–3, F–3 or F–

10. The Commission notes that the

listing standards of the three markets

require a minimum number of

independent directors on the Board of

Directors. This requirement should

ensure that the independent directors of

the acquiror or target will evaluate the

offer and that sufficient information will

be distributed to shareholders and

markets, so that investors can make an

informed decision regarding whether to

sell or hold securities.

The Commission also believes that it

is appropriate to amend Rule 2710 to

exempt from filing spin-off and reverse

spin-off transactions involving a

subsidiary of affiliate of the issuer,

where the securities are issued as a

dividend or distribution to current

shareholders, and securities registered

with the SEC in connection with a

merger, acquisition, or other similar

business combination. The Commission

agrees that spin-off transactions to

existing securityholders as a dividend or

other distribution may not involve an

investment decision by shareholders

and, consequently, any member acting

as a financial advisor to the parent

company is not generally involved in

any public solicitation in connection

with the transaction.21 Further, merger

transactions and similar business

combinations registered with the SEC

generally only involve a member in

providing financial advice to the Board

of Directors of the acquiror or target,

that may include an obligation that the
59932 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Notices

22 15 U.S.C. 78s(b)(2).

23 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3November 18, 1996, the NASD filed with the

Commission a proposed rule change to implement

the Actual Size Rule on a pilot basis. (SR–NASD–

96–43). Among other things, the filing and

subsequent amendments proposed to allow market

makers to quote in minimum sizes of 100 shares for

a three-month pilot Program in the 50 Nasdaq

securities subject to mandatory compliance with

Exchange Act Rule 11Ac1–4 (‘‘Limit Order Display

Rule’’) on January 20, 1997. The remaining

securities were still subject to the existing

minimum quotation display requirements for

proprietary quotes. The proposed rule change was

intended by the NASD to facilitate the display of

customer limit orders in accordance with the Limit

Order Display Rule. The Commission approved the

pilot through April 18, 1997. Securities Exchange

Act Release 38512 (April 15, 1997) 62 FR 19373

(April 21, 1997) (SR–NASD–97–25).

On April 15, 1997, the Commission issued an

order granting accelerated approval to a NASD

proposed rule change that extended the pilot from

April 18, 1997, to July 18, 1997. Securities

Exchange Act Release 38512 (April 15, 1997) 62 FR

19373 (April 21, 1997) (SR–NASD–97–25).

On July 18, 1997, the Commission approved a

rule change proposed by the NASD to extend the

pilot from July 18, 1997 to December 31, 1997.

Securities Exchange Act Release No. 38851 (July 18,

1997) 62 FR 39565 (July 23, 1997) (SR–NASD–97–

49). The Commission did so to give it additional

time to evaluate the economic studies and review

the public’s comments on the NASD’s June 3, 1997,

study. In addition, the Commission stated that it

believed that extending the pilot would benefit the

markets by providing more experience with the

Actual Size Rule before a decision is made

regarding approval.

4See Letter from Robert E. Aber, Vice President

and General Counsel, the Nasdaq Stock Market,

Inc., to Katherine England, Assistant Director,

Office of Market Supervision, Division of Market

Regulation, Commission, dated July 10, 1997.

5See Letter from Robert E. Aber, Vice President

and General Counsel, the Nasdaq Stock Market,

Inc., to Katherine England, Assistant Director,

Office of Market Supervision, Division of Market

Regulation, Commission, dated July 17, 1997.

6Securities Exchange Act Release No. 38872 (July

24, 1997) 62 FR 40879 (July 30, 1997) (SR–NASD–

97–26).

7See Letter from Robert E. Aber, Vice President

and General Counsel, the Nasdaq Stock Market,

Inc., to Katherine England, Assistant Director,

Office of Market Supervision, Division of Market

Regulation, Commission, dated September 15, 1997.

member issue a fairness opinion

regarding the acquisition price.

B. Amendment to Rule 2720

The Commission believes that it is

appropriate to amend Rule 2720 to state

that in any exchange offer, merger and

acquisition transaction or corporate

reorganization subject to Rule 2720, the

provision which requires that the price

or yield of the securities be established

based on the recommendation of a

qualified independent underwriter shall

not apply and, instead, the exchange

values of the securities being offered in

the transaction shall not be less than

that recommended by a qualified

independent underwriter. The

Commission believes that the proposed

new provision would clarify that the

obligation of the qualified independent

underwriter is to ensure that the

recipient of the exchange offer, which is

the party intended to be protected by

the participation of a qualified

independent underwriter, shall not

receive fewer of the securities being

issued in exchange for each security

held by the recipient than is

recommended by the qualified

independent underwriter.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,22 that the

proposed rule change (SR–NASD–97–

38) is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.23

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–29197 Filed 11–4–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39285; File No. SR–NASD–

97–26]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Granting Approval

to Proposed Rule Change and Notice

of Filing and Order Granting

Accelerated Approved to Amendment

No. 3 Relating to an Extension and

Expansion of the Pilot for the NASD’s

Rule Permitting Market Makers To

Display Their Actual Quotation Size

October 29, 1997.

I. Background

On April 11, 1997, the National

Association of Securities Dealers, Inc.

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

the Securities and Exchange

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

a proposed rule change pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Exchange

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

amend NASD Rule 4613(a)(1)(C) by (a)

expanding from 50 to 150 the number of

securities in a pilot program for which

market makers may quote their actual

size by reducing the minimum

quotation size requirement for market

makers in certain securities listed on the

Nasdaq Stock Market (‘‘Nasdaq’’) to one

normal unit of trading (‘‘Actual Size

Rule’’), and (b) extending the pilot

through December 31, 1997.3

On July 10, 1997, the NASD filed

Amendment No. 1 to the proposed rule

change proposing to extend the pilot

through March 27, 1998 and expand it

to 150 stocks.4 On July 17, 1997, the

NASD filed with the Commission

Amendment No. 2, to correct a technical

deficiency in Amendment No. 1.5 The

proposal was noticed for comment on

July 24, 1996.6

On September 15, 1997, the NASD

filed Amendment No. 3,7 proposing to

extend the pilot as previously noted and

to expand the pilot by adding a different

group of 100 securities to those 50

currently subject to the Actual Size Rule

(‘‘First 50’’) than was proposed in

Amendment Nos. 1 and 2. The NASD

believes that this second group of

securities will provide a better basis for

comparison and economic analysis

comparing the Actual Size Rule’s effect

on pilot and non-pilot Nasdaq

securities. In addition, Nasdaq proposes

to replace some of securities in the

initial 50 stock pilot that are no longer

listed on Nasdaq. Amendment No. 3

also proposed extending the pilot

through March 27, 1998.

For the reasons discussed below, the

Commission has determined to approve

the proposed rule change.

II. Proposed Rule Change

The NASD proposes to amend NASD

Rule 4613(a)(1)(C) to allow market

makers to quote their actual size by

reducing the minimum quotation size

requirement for market makers in

certain securities listed on Nasdaq to

one normal unit of trading. As discussed

below, the Actual Size Rule presently

applies to a group of 50 Nasdaq

securities on a pilot basis. The proposed

rule change would expand the pilot

group to 150 stocks and extend the pilot

until March 27, 1998. The text of the

proposed rule change is as follows.

(Additions are italicized; deletions are

bracketed.)

* * * * *

4613. Character of Quotations

(a) Two-Sided quotations

(1) No Change

(A)–(B) No Change

(C) As part of a pilot program

implemented by the Nasdaq Stock

Market, during the period January 20,

1997 through at least [December 31,

1997] March 27, 1998, a registered

market maker in a security listed on the

Nasdaq Stock Market that became

subject to mandatory compliance with

SEC Rule 11Ac1–4 on January 20, 1997

or identified by Nasdaq as being

otherwise subject to the pilot program as

expanded and approved by the

Commission, must display a quotation