Federal Register / Vol. 63, No. 108 / Friday, June 5, 1998 / Notices 30789

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

2 17 CFR 240.19b–4.

3Letter from Joan C. Conley, Corporate Secretary,

NASD Regulation, Inc. to Katherine England,

Assistant Director, Division of Market Regulation,

Commission dated May 4, 1998.

4See Securities Exchange Act Release No. 39957

(May 1, 1998), 63 FR 26238 (File No. SR–NASD–

98–34).

5Securities Exchange Act Release No. 37538

(Aug. 8, 1996) (SEC Order Instituting Public

Proceedings Pursuant to Section 19(h)(1) of the

Securities Exchange Act of 1934, Making Findings

and Imposing Remedial Sanctions, In the Matter of

National Association of Securities Dealers, Inc.,

Administrative Proceeding File No. 3–9056). The

order included fourteen undertakings

(‘‘Undertakings’’) addressing actions to be taken by

the Association in response to the findings of the

Order.

outstanding voting securities other than

those granted to its directors, officers,

and employees pursuant to these three

plans.

Applicant’s Legal Analysis

1. Section 63(3) of the Act permits a

BDC to sell its common stock at a price

below current net asset value upon the

exercise of any option issued in

accordance with section 61(a)(3) of the

Act.

2. Section 61(a)(3)(B) of the Act

provides, in pertinent part, that a BDC

may issue to its non-employee directors

options to purchase its voting securities

pursuant to an executive compensation

plan, provided that: (a) the options

expire by their terms within ten years;

(b) the exercise price of the options is

not less than the current market value

of the underlying securities at the date

of the issuance of the options, or if no

market exists, the current net asset value

of the voting securities; (c) the proposal

to issue the options is authorized by the

BDC’s shareholders, and is approved by

order of the SEC upon application; (d)

the options are not transferable except

for disposition by gift, will or intestacy;

(e) no investment adviser of the BDC

receives any compensation described in

section 205(1) of the Investment

Advisers Act of 1940, except to the

extent permitted by clause (A) or (B) of

that section; and (f) the BDC does not

have a profit-sharing plan as described

in section 57(n) of the Act.

3. In addition, section 61(a)(3)(B) of

the Act provides that the amount of the

BDC’s voting securities that would

result from the exercise of all

outstanding warrants, options, and

rights at the time of issuance may not

exceed 25% of the BDC’s outstanding

voting securities, except that if the

amount of voting securities that would

result from the exercise of all

outstanding warrants, options, and

rights issued to the BDC’s directors,

officers, and employees pursuant to an

executive compensation plan would

exceed 15% of the BDC’s outstanding

voting securities, then the total amount

of voting securities that would result

from the exercise of all outstanding

warrants, options, and rights at the time

of issuance will not exceed 20% of the

outstanding voting securities of the

BDC.

4. Applicant represents that the

Amended Plan would comply with the

requirements of section 61(a) (3) (B) of

the Act. Applicant submits that the

terms of the Amended Plan are fair and

reasonable and do not involve

overreaching of applicant or its

shareholders. Applicant states that the

Options would not be immediately

exercisable and do not vest until the

first anniversary of the date of the grant.

Applicant asserts that under the

Amended Plan, even if each of the

current Non-Employee Directors is reelected for a period of three years, the

total amount of common stock issuable

under the Options would be 164,000

shares (28,000 shares of which would

not yet be exercisable) or 0.44% of

applicant’s outstanding common stock.

In addition, applicant states that the

total number of shares of common stock

issuable under the Options that may be

granted in any one year to the current

Non-Employee Directors represents

.08% of applicant’s outstanding

common stock. Applicant asserts that,

given the small number of common

stock issuable upon exercise of the

Options, the exercise of the Options

pursuant to the Amended Plan will not

have a substantial dilutive effect on the

net asset value of applicant’s common

stock. Applicant states that, the total

amount of voting securities that would

be issuable under the Amended Plan at

the time of issuance would not exceed

20% of applicant’s outstanding voting

securities.

5. Applicant states that its directors

are directly involved in the oversight of

the applicant’s affairs, and applicant

relies on the judgment and experience

of its directors. Applicant also states

that Non-Employee Directors are

involved in applicant’s ongoing

operations and marketing activities, and

applicant’s management regularly

solicits Non-Employee Directors for

their ideas and advice with respect to

prospective investments, acquisitions,

and operational matters. Applicant

believes that the Options will provide

additional incentives to Non-Employee

Directors to remain on the Board.

Applicant also believes that the Options

provide a means for Non-Employee

Directors to increase their ownership

interests in the applicant, thereby

further ensuring close identification of

their interests with those of the

applicant and its shareholders.

Applicant asserts that incentives such as

Options will maintain continuity in the

Board’s membership and help attract

and retain highly experienced

professionals that are critical to

applicant’s success as a BDC.

For the Commission, by the Division of

Investment Management, pursuant to

delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14919 Filed 6–4–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40026, File No. SR–NASD–

98–34]

Self-Regulatory Organizations; Order

Granting Accelerated Approval to

Proposed Rule Change by the National

Association of Securities Dealers, Inc.,

Relating to Cancellations and

Suspensions for Failure To Comply

With Arbitration Award

May 26, 1998.

On May 1, 1998, the National

Association of Securities Dealers, Inc.

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

the Securities and Exchange

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

a proposed rule change pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’),1 and

Rule 19b–4 thereunder.2 The filing was

thereafter amended on May 4, 1998.3 In

its proposal, the Association sought

approval of an amendment to its Code

of Procedure, to permit members of the

NASD Regulation, Inc. (‘‘NASD

Regulation’’) Office of Hearing Officers

to oversee non-summary proceedings

involving cancellations and suspensions

related to failure to comply with an

arbitration award. Notice of the

proposal, including Amendment No. 1

thereto, was published in the Federal

Register on May 12, 1998 (‘‘Notice’’).4

The Commission did not receive

comment letters on the filing.

I. Introduction and Background

In connection with the recent

reorganization of the Association

following issuance of the SEC Order

Instituting Public Proceedings Pursuant

to Section 19(h)(1) of the Securities

Exchange Act of 1934, Making Findings

and Imposing Remedial Sanctions 5 and

the Report Pursuant to Section 21(a) of

the Securities Exchange Act of 1934

Regarding the NASD and The Nasdaq
30790 Federal Register / Vol. 63, No. 108 / Friday, June 5, 1998 / Notices

6Report and Appendix to Report Pursuant to

Section 21(a) of the Securities Exchange Act of 1934

Regarding the NASD and The Nasdaq Stock Market

(Aug. 8, 1996).

7Securities Exchange Act Release No. 38908

(August 7, 1987), 62 FR 43385, 43407 (August 13,

1997) (File No. SR–NASD–97–28).

8 Id.

9See current Rule 9514.

10See proposed Rule 9514.

11Release No. 34–38908.

12 15 U.S.C. 78s(b).

13 15 U.S.C. 78o–3.

14The Commission has recognized that a bona

fide inability to pay an arbitration award is an

important consideration determining whether any

sanction for failure to pay an arbitration award is

excessive or oppressive. See In the Matter of the

Application of Bruce M. Zipper, Securities

Exchange Act Release No. 33376, Admin. Proc. File

No. 3–7908. (Dec. 23, 1993).

15Release No. 34–38908.

Stock Market 6 on August 8, 1997, the

Association revised a substantial

portion of its Code of Procedure. Among

those amendments were included

changes to the summary and nonsummary proceedings addressing (1)

limitations of the activities of members

experiencing financial or operational

difficulties; (2) summary and nonsummary suspension, cancellation, bar,

limitation or prohibition on access to

NASD services; (3) eligibility; and (4)

exemptions from specific NASD rules.

In approving these amendments, which

consolidated, reorganized and clarified

prior rules, the Commission specifically

noted that the changes would ‘‘assist the

NASD in promulgating and applying on

a consistent basis uniform standards for

regulatory and other access issues, as

well as instituting safeguards to ensure

fair and evenhanded access to all

services and facilities of the NASD,

consistent with the 21(a) Report and the

Undertakings [and] the Act * * *.’’ 7

The amendments to the Rules of the

Association contained in the

Association’s current proposal

supplement the earlier revisions

approved by the Commission in SR–

NASD–97–28.8

II. Description of the Proposal

The propose of the Association’s

proposal is to change the composition of

the hearing panels used for nonsummary proceedings in which the

Association seeks to suspend or cancel

the membership of a member or the

registration of a person for failure to

comply with an arbitration award or a

settlement agreement related to NASD

arbitration or mediation. Currently,

these proceedings must be heard by a

hearing panel composed of one current

NASD Regulation director plus at least

one other current or former NASD or

NASD Regulation board member.9

Under the proposal, these procedures

would instead by heard by a single

member of the Office of Hearing

Officers, who would be appointed by

the Chief Hearing Officer.10 The Officer

of Hearing Officers is an independent

office within NASD Regulation whose

purpose is to provide a group of

independent and professional hearing

officers (comprised of attorneys with

appropriate experience and training) to

preside over all formal NASD

disciplinary proceedings.11 Their

jurisdiction will be extended to nonsummary proceedings upon approval of

the current proposal.

III. Discussion

As discussed below, the Commission

has determined at this time to approve

the Association’s proposal. The

standard by which the Commission

must evaluate a proposed rule change is

set forth in Section 19(b) of the Act. The

Commission must approval a proposed

NASD rule change if it finds that the

proposal is consistent with the

requirements of the Act and the rules

and regulations thereunder that govern

the NASD.12 In evaluating a given

proposal, the Commission examines the

record before it and all relevant factors

and necessary information. In addition,

Section 15A of the Act establishes

specific standards for NASD rules

against which the Commission must

measure the proposal.13

The Commission has determined that

substitution of a single hearing officer

instead of two board members is

warranted because of the advantages to

such substitution. First, the proposed

rule change does not alter the right to a

hearing concerning a failure to pay an

arbitration award; it merely alters the

composition of the hearing panel.

Moreover, it would be considerably

more efficient to have one hearing

officer conduct the hearing on these

issues and render a decision, rather than

the multiple Board members required by

the current version of Rule 9514. The

members of the Board, who serve the

Association on a part-time basis, have

many constraints upon their time. The

attorneys comprising the Office of

Hearing Officers, however, are full-time

Association employees who primarily

focus on NASD Regulation proceedings.

In addition, the members of the Office

of Hearing Officers are well-suited to

resolve the issues presented in these

types of hearings due to the training and

experience gained in oversight of the

NASD’s disciplinary proceedings under

the Rule 9200 Series. Finally, the issues

to be resolved in the proceedings

underlying this proposal are somewhat

narrow, and generally limited to (i)

whether the member or person paid the

award in full or fully complied with the

settlement agreement, (ii) whether the

claimant has agreed to installment

payments or has otherwise settled the

matter, (iii) whether the member or

person has filed a timely motion to

vacate or modify the arbitration award

and such motion has not been denied,

(iv) whether the member or person has

filed a petition in bankruptcy and the

bankruptcy proceeding is pending, or

the award or payment owed under the

settlement agreement has been

discharged by the bankruptcy court, and

(v) whether the member or person is

unable to pay the award.14 All of these

reasons indicate that the proposal is

consistent with the Act, and ‘‘should

enhance both the fair and efficient

operation of the NASD, and the

dispassionate and fair application of the

rules in the NASD’s regulatory

activities.15

IV. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

In its filing, the NASD requested that

the Commission find good cause

pursuant to Section 19(b)(2) for

approving the proposed rule change

prior to the 30th day after publication in

the Federal Register. As discussed

above, 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 NASD and, in

particular, the requirements of Section

15A and the rules and regulations

thereunder. In addition, the

Commission finds good cause for

approving the proposed rule change

prior to the 30th day after the date of

publication of notice of filing thereof in

that accelerated approval will benefit

public interest and the protection of

investors by enhancing the efficiency of

the Association’s procedures for

suspending or canceling the

membership of a member or the

registration of a person for failure to

comply with an arbitration award or a

settlement agreement related to an

NASD arbitration or mediation. The

current rule requiring current or former

NASD Governors or NASD Regulation

Directors to serve on such Hearing

Panels is imposing a burden on the

process due to the part-time nature of

service on the governing boards and the

amount of time necessary to resolve

these types of disputes. The procedure

needs to be changed quickly so that

such persons will no longer be called

upon to resolve these relatively narrow
Federal Register / Vol. 63, No. 108 / Friday, June 5, 1998 / Notices 30791

16U.S.C. 78o–3.

17 15 U.S.C. 78c(f).

18 15 U.S.C. 78s(b)(2).

19 17 CFR 200.30–3(a)(12).

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

disputes. Thus, the commission finds

good causes to accelerate approval of

the Association’s proposal.

V. Conclusion

The Commission believes that the

proposed rule change is consistent with

the Act, and, particularly, with Section

15A thereof.16 In approving the

proposal, the Commission has

considered its impact on efficiency,

competition, and capital formation.17

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,18 that the

proposed rule change (SR–NASD–98–

34), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.19

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14920 Filed 6–4–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40047; File No. SR–NASD–

98–09]

Self-Regulatory Organizations; Notice

of Proposed Rule Change and

Amendment No. 1 by the National

Association of Securities Dealers, Inc.

Relating to Trade Reporting Rules

May 29, 1998.

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

Securities Exchange Act of 1934

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

February 2, 1998, 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 (‘‘SEC’’ or ‘‘Commission’’)

a proposed rule change. Nasdaq filed an

amendment to the proposed rule change

on May 19, 1998. The proposed rule

change, as amended, is 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 is proposing to amend various

trade reporting rules of the Association.

Specifically the proposal would: (1)

Implement a new trade report modifier

to identify trades effected at a prior

reference price; (2) eliminate the 10,000

share limitation on individual trades

that may be ‘‘bunched’’ for trade

reporting purposes; (3) require

electronic communications networks

(‘‘ECNs’’) to be responsible for reporting

all trades executed within the ECN; and

(4) address riskless principal trades

involving exchange-listed securities

traded in the Third Market. Below is the

text of the proposed rule change.

Proposed new language is in italics;

proposed deletion are in brackets.

* * * * *

4623. Electronic Communications

Networks

(a) No Change.

(b) An electronic communications

network that seeks to utilize the Nasdaqprovided means to comply with the

electronic communications network

display alternative shall:

(1)–(5) No Change.

(6) report all transactions executed by

or through the electronic

communications network, with the

exception of transactions executed

through an automated execution system

operated by Nasdaq (e.g., SelectNet).

* * * * *

4632. Transaction Reporting

(a)(1) through (a)(8) No Change.

(9) All members shall append a trade

report modifier as designated by the

Association to transaction reports that

reflect a price different from the current

market when the execution is based on

a prior reference point in time, which

shall be accompanied by the prior

reference time.

(b) through (f)(1)(C) No Change.

(D) Orders received or initiated by the

reporting member which are impractical

to report individually and are executed

at the same price within 60 seconds of

execution of the initial transaction;

provided however, that no individual

order of 10,000 shares or more may be

aggregated in a transaction report and

that the aggregated transaction report

shall be made within 90 seconds of the

initial execution reported therein.

Furthermore, it is not permissible for a

member to withhold reporting a trade in

anticipation of aggregating the

transaction with other transactions. The

limitation on aggregating individual

orders of 10,000 shares or more for a

particular security shall not apply on

the first day of secondary market

trading of an IPO for that security.

Examples: No Changes.

(2) No Change.

* * * * *

4642. Transaction Reporting

(a)(1) through (a)(8) No Change.

(9) All members shall append a trade

report modifier as designated by the

Association to transaction reports that

reflect a price different from the current

market when the execution is based on

a prior reference point in time, which

shall be accompanied by the prior

reference time.

(b) through (f)(1)(C) No Change.

(D) Orders received or initiated by the

reporting member which are impractical

to report individually and are executed

at the same price within 60 seconds of

execution of the initial transaction;

provided however, that no individual of

10,000 shares or more may be

aggregated in a transaction report and

that the aggregated transaction report

shall be made within 90 seconds of the

initial execution reported therein.

Furthermore, it is not permissible for a

member to withhold reporting a trade in

anticipation of aggregating the

transaction with other transactions. The

limitation on aggregating individual

orders of 10,000 shares or more for a

particular security shall not apply on

the first day of secondary market

trading of an IPO for that security.

(2) No Change.

* * * * *

4652. Transaction Reporting

(a)(1) through (a)(7) No Change.

(8) All members shall append a trade

report modifier as designated by the

Association to transaction reports that

reflect a price different from the current

market when the execution is based on

a prior reference point in time, which

shall be accompanied by the prior

reference time.

(b) through (f) No Change.

* * * * *

6420. Transaction Reporting

(a) through (d)(3)(A) No Change.

(B) Exception: A ‘‘riskless’’ principal

transaction in which a member [that is

not a market maker in the security] after

having received from a customer an

order to buy, purchases the security as

principal from another member or

customer to satisfy the order to buy or,

after having received from a customer

an order to sell, sells the security as

principal to another member or

customer to satisfy the order to sell,

shall be reported as one transaction in

the same manner as an agency

transaction, excluding the mark-up or

mark-down. A riskless principal

transaction in which a member

purchases or sells the security on an

exchange to satisfy a customer’s order

will be reported by the exchange and

the member shall not report.