Federal Register / Vol. 74, No. 117 / Friday, June 19, 2009 / Notices 29255 

13 17 CFR 200.30–3(a)(12). 

1This Amendment No. 1 to SR–FINRA–2007–009 

replaces and supersedes the original filing 

submitted on September 6, 2007, except with regard 

to Exhibit 2 (NASD Notice to Members 06–52 and 

comments received in response to NASD Notice to 

Members 06–52). 

2 15 U.S.C. 78s(b)(1). 

3 17 CFR 240.19b–4. 

4Exchange Act Release No. 59880 (May 7, 2009), 

74 FR 22600 (May 13, 2009) (SR–FINRA–2007– 

009). 

5Letter from the Securities Industry and 

Financial Markets Association, dated November 1, 

2006 (the ‘‘SIFMA Letter’’); and Letter from the 

American Bar Association, dated December 4, 2006 

(the ‘‘ABA Letter’’). 

such rule change if it appears to the 

Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

purposes of the Act. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NYSEArca–2009–51 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NYSEArca–2009–51. This 

file number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). 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, 100 F Street, NE., Washington, 

DC 20549, on official business days 

between the hours of 10 a.m. and 3 p.m. 

Copies of the filing also will be available 

for inspection and copying at the 

principal office of the Exchange. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–NYSEArca–2009–51 and 

should be submitted on or before July 

10, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–14350 Filed 6–18–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60113; File No. SR–FINRA– 

2007–009] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Approving 

Proposed Rule Change, as Modified by 

Amendment No. 1 Thereto, To 

Modernize and Simplify NASD Rule 

2720 

June 15, 2009. 

I. Introduction 

The Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’) (f/k/a 

National Association of Securities 

Dealers, Inc. (‘‘NASD’’)) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’ or ‘‘SEC’’) on September 

6, 2007, and amended on May 1, 2009,1

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

Securities Exchange Act of 1934 

(‘‘Exchange Act’’ or ‘‘Act’’) 2 and Rule 

19b–4 thereunder,3 a proposal to 

modernize and simplify NASD Rule 

2720 (Distributions of Securities of 

Members and Affiliates—Conflicts of 

Interest) (‘‘Rule 2720’’ or ‘‘Rule’’), which 

governs public offerings of securities in 

which a member with a conflict of 

interest participates, and make 

corresponding changes to FINRA Rule 

5110 (Corporate Financing Rule) (‘‘Rule 

5110’’). This proposal was published for 

comment in the Federal Register on 

May 13, 2009.4 The Commission 

received no comments on the proposal. 

This order approves the proposed rule 

change, as modified by Amendment No. 

1. 

II. Description of the Proposed Rule 

Change 

Rule 2720 governs public offerings of 

securities issued by participating 

members or their affiliates, public 

offerings in which a member or any of 

its associated persons or affiliates has a 

conflict of interest, and public offerings 

that result in a member becoming a 

public company. The Rule regulates the 

potential conflicts of interest that exist 

with respect to the pricing of such 

offerings and the conduct of due 

diligence when a member participates 

in such offerings. 

In September 2006, FINRA published 

NASD Notice to Members 06–52 

requesting comment on proposed 

amendments to Rule 2720 (the ‘‘original 

proposal’’). FINRA received two 

comment letters that generally 

supported the proposal and recognized 

the need to modernize the Rule.5

However, in response to the comments 

received, FINRA staff made certain 

revisions to the original proposal in its 

September 6, 2007 filing with the 

Commission. In order to address 

Commission staff’s comments, FINRA 

filed Amendment No. 1 to SR–FINRA– 

2007–009 on May 1, 2009. 

The proposed rule change would 

replace the current Rule in its entirety 

with proposed Rule 2720 entitled 

‘‘Public Offerings of Securities With 

Conflicts of Interest.’’ The proposal 

would, among other things: (1) Exempt 

from the filing and qualified 

independent underwriter (‘‘QIU’’) 

requirements public offerings of 

investment grade rated securities, public 

offerings of securities that have a bona 

fide public market, and public offerings 

in which the member primarily 

responsible for managing the offering 

does not have a conflict of interest and 

can meet the disciplinary history 

requirements for a QIU; (2) Amend the 

definition of ‘‘conflict of interest’’ to 

include public offerings in which at 

least five percent of the offering 

proceeds are directed to a participating 

member or its affiliates; (3) Modify the 

Rule’s disclosure requirements to 

provide more prominent disclosure of 

conflicts of interest in the offering 

documents; and (4) Amend the Rule’s 

provisions regarding the use of a QIU to 

eliminate the requirement that the QIU 

render a pricing opinion. In addition, 

the proposed rule change would amend 

the QIU qualification requirements to 

focus on the experience of the firm 

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29256 Federal Register / Vol. 74, No. 117 / Friday, June 19, 2009 / Notices 

6See proposed Rule 2720(a)(1)(A). 

7FINRA clarified their understanding that all 

syndicate members have due diligence 

responsibility, but the book-runner(s) in a firm 

commitment offering and the lead placement 

agent(s) in a best efforts offering typically hire 

outside counsel to help members meet their due 

diligence obligations. 

8SIFMA Letter. 

9See proposed Rule 2720(a)(1)(B). 

10 ‘‘Bona fide independent market’’ is defined in 

current Rule 2720(b)(3) as a market in a security 

that is listed on a national securities exchange or 

Nasdaq with a market price of $5 per share, 

aggregate trading volume of 500,000 shares over 90 

days and a public float of 5 million shares. 

11 17 CFR 242.100 to 105. 

12ABA Letter. 

13See proposed Rule 2720(a)(1)(C). Thus, 

proposed Rule 2720(a)(1)(C) would apply to public 

offerings of securities that have not received an 

individual rating, but are of the same class or series 

and are considered ‘‘pari passu’’ with other 

investment grade rated securities issued by the 

same company. 

14ABA Letter. 

15See Exchange Act Release No. 50749 

(November 29, 2004), 69 FR 70735 (December 7, 

2004) (notice of filing of SR–NASD–2004–022) and 

Amendment No. 5 (filed on August 31, 2007), 

available at http://www.finra.org/Industry/ 

Regulation/RuleFilings/2004/P036671. 16On September 11, 2008, the Commission 

approved proposed rule change SR–FINRA–2008– 

039, in which FINRA proposed, among other things, 

to adopt NASD Rule 2710 as Rule 5110 in the 

Consolidated FINRA Rulebook. See Exchange Act 

Release No. 58514 (September 11, 2008), 73 FR 

54190 (September 18, 2008). SR–FINRA–2008–039 

was implemented on December 15, 2008. See 

Regulatory Notice 08–57 (October 2008). 

17ABA Letter. 

rather than its board of directors, 

prohibit a member from acting as a QIU 

if it would receive more than five 

percent of the proceeds of an offering, 

and lengthen from five to ten years the 

amount of time that a person involved 

in due diligence in a supervisory 

capacity must have a clean disciplinary 

history. These and the other proposed 

amendments are discussed in greater 

detail below. 

A. Proposed Rule 2720(a) 

Proposed Rule 2720(a) would provide 

that no member that has a conflict of 

interest may participate in a public 

offering unless the offering meets one of 

the exemptions set forth in paragraph 

(a)(1) or a QIU participates in the 

offering pursuant to paragraph (a)(2). 

1. Offerings Exempt From the QIU and 

Filing Requirements Under Paragraph 

(a)(1) 

FINRA proposed an exemption from 

the QIU and filing requirements for 

public offerings in which the member 

primarily responsible for managing the 

offering (e.g., the book-running lead 

manager or lead placement agent) does 

not have a conflict of interest, is not an 

affiliate of a member that has a conflict 

of interest, and can meet the 

disciplinary history requirements for a 

QIU under proposed paragraph 

(f)(12)(E).6 FINRA staff believed that a 

QIU should not be required for such 

offerings because the book-running lead 

manager or lead placement agent (or 

member acting in a similar capacity), 

which does not have conflict of interest, 

would be expected to perform the 

necessary due diligence that would 

otherwise be required of a QIU.7

In response to comments on the 

original proposal,8 FINRA amended this 

provision to clarify that it would apply 

to public offerings in which there are 

joint books or that are best efforts 

offerings. However, where there are two 

or more co-lead managers or co-lead 

placement agents that have equal 

responsibilities with regard to due 

diligence, FINRA clarified that each 

would need to be free of conflicts of 

interest. FINRA believes that, due to the 

important role a book-runner or dealermanager can be expected to play in the 

due diligence process in an offering, 

even if that responsibility is shared 

equally with other members, the Rule’s 

QIU provisions would apply and the 

offering would have to be filed for 

review if any book-runner or dealermanager has a conflict. 

FINRA also proposed an exemption 

from the QIU and filing requirements for 

public offerings of securities that have a 

bona fide public market.9 The current 

Rule exempts public offerings of 

securities for which there is a ‘‘bona fide 

independent market’’ from Rule 2720’s 

QIU requirement, but not the filing 

requirement.10 The proposed rule 

change would replace the term ‘‘bona 

fide independent market’’ with ‘‘bona 

fide public market,’’ which is defined in 

proposed Rule 2720(f)(3) in accordance 

with the numerical standards set forth 

in Regulation M.11 Specifically, ‘‘bona 

fide public market’’ would be defined in 

the proposal as a market for a security 

issued by a company that has been 

reporting under the Exchange Act for at 

least 90 days, is current in its reporting 

requirements and whose securities are 

listed on a national securities exchange 

with an average daily trading volume of 

at least $1 million, provided that the 

issuer’s common equity securities have 

a public float value of at least $150 

million. One commenter expressed 

strong support for the proposed 

definition of ‘‘bona fide public 

market.’’ 12

FINRA also proposed to exempt from 

the filing requirement (and retain the 

existing exemption from the QIU 

requirement) public offerings of 

investment grade rated securities and 

securities in the same series that have 

equal rights and obligations as 

investment grade rated securities.13 In 

response to comments on the original 

proposal,14 FINRA proposed to define 

‘‘investment grade rated’’ in proposed 

Rule 2720(f)(8) to refer to securities that 

are rated by a nationally recognized 

statistical rating organization in one of 

its four highest generic rating categories. 

This definition is consistent with the 

definition proposed by FINRA in SR– 

NASD–2004–022 relating to the filing 

requirements and the regulation of 

public offerings of securities registered 

with the Commission and offered by 

members pursuant to Securities Act 

Rule 415 (the ‘‘proposed shelf 

amendments’’).15

These three types of public offerings 

described above and enumerated in 

paragraphs (a)(1)(A) through (a)(1)(C) of 

proposed Rule 2720 would not be 

subject to the QIU requirements of the 

proposed Rule and, by operation of 

proposed Rule 2720(d), they would not 

be subject to the filing requirements of 

Rule 5110 (formerly NASD Rule 

2710).16 They would be, however, 

subject to the other provisions of 

proposed Rule 2720, e.g., the escrow 

and discretionary account requirements 

in paragraphs (b) and (c) respectively, if 

applicable. Additionally, these public 

offerings would be subject to certain 

disclosure requirements. Proposed Rule 

2720(a)(1) would require prominent 

disclosure of the nature of the conflict 

of interest in the prospectus, offering 

circular, or similar document for the 

public offering. 

In response to the original proposal, 

one commenter requested clarification 

regarding the ‘‘prominent disclosure’’ 

requirement in the proposed Rule.17

Proposed Rule 2720(f)(10) provides a 

description of how a member could 

make ‘‘prominent disclosure’’ for 

purposes of paragraphs (a)(1) and 

(a)(2)(B) of the proposed Rule. 

Specifically, a member could make the 

notation ‘‘(Conflicts of Interest)’’ 

following the listing of the Plan of 

Distribution in the Table of Contents 

section required in Item 502 of 

Regulation S–K, and provide such 

disclosures in the Plan of Distribution 

section required in Item 508 and any 

Prospectus Summary section required in 

Item 503 of Regulation S–K. For offering 

documents not subject to Regulation S– 

K, ‘‘prominent disclosure’’ could be 

made by providing disclosure on the 

front page of the offering document that 

a conflict exists, with a cross-reference 

to the discussion within the offering 

document and in the summary of the 

offering document if one is included. 

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Federal Register / Vol. 74, No. 117 / Friday, June 19, 2009 / Notices 29257 

18The requisite qualifications of a QIU are set 

forth in the definition of ‘‘qualified independent 

underwriter’’ in proposed Rule 2720(f)(12), which 

is discussed in greater detail below. 

19ABA Letter; SIFMA Letter. 

20See proposed Rule 2720(d). 

21ABA Letter; SIFMA Letter. 

22Members are reminded that additional escrow 

account maintenance and payment requirements 

may be applicable under Exchange Act Rule 15c2– 

4. 

23ABA Letter. 

24The ‘‘seasoned issuer’’ filing exemption in Rule 

5110(b)(7)(C) currently exempts offerings registered 

on Forms S–3 and F–3 by issuers that meet the 

standards for those Forms prior to October 21, 1992 

(i.e., a three-year reporting history and either $150 

million float or $100 million float and annual 

Continued 

FINRA stated that these methods of 

disclosure would be considered a nonexclusive safe harbor for effecting 

‘‘prominent disclosure,’’ and clarified it 

would consider alternative but equally 

prominent disclosures on a case-by-case 

basis. 

2. Offerings in Which a QIU Must 

Participate Under Paragraph (a)(2) 

If a member with a conflict of interest 

participates in a public offering that 

does not meet the conditions of 

proposed Rule 2720(a)(1), then 

proposed Rule 2720(a)(2)(A) would 

require that a QIU participate in the 

preparation of the registration statement 

and the prospectus, offering circular or 

similar document and exercise the usual 

standards of ‘‘due diligence’’ with 

respect thereto.18

Like proposed Rule 2720(a)(1), 

proposed Rule 2720(a)(2)(B) would 

require ‘‘prominent disclosure’’ (as 

defined in proposed Rule 2720(f)(10)) in 

the prospectus, offering circular, or 

similar document of the nature of the 

conflict of interest. In addition, 

proposed Rule 2720(a)(2)(B) would 

require disclosure of the name of the 

member acting as QIU and a brief 

statement regarding the role and 

responsibilities of the QIU. The 

disclosure requirements contained in 

current Rule 2720(d) require that, 

among other things, the offering 

documents expressly state that the 

member acting as QIU (if one is required 

for the offering) is assuming its 

responsibilities in pricing the offering 

and conducting due diligence. In 

response to commenters’ concerns that 

such a statement potentially could give 

rise to liability on the part of the QIU,19

FINRA proposed to replace this 

disclosure requirement with a more 

general statement about the role and 

responsibilities of a QIU. 

FINRA clarified that a public offering 

in which a QIU participates pursuant to 

proposed paragraph (a)(2) would 

continue to be subject to the filing 

requirements of Rule 5110.20

Additionally, as in the Rule currently, a 

public offering in which a QIU 

participates would be required to meet 

proposed Rule 2720’s escrow and 

discretionary account requirements, if 

applicable. 

Current Rule 2720 requires that a QIU 

provide an opinion that the price at 

which equity securities are offered to 

the public is no higher, or the yield for 

debt securities is no lower, than that 

recommended by the QIU. The 

proposed rule change would eliminate 

the requirement that a QIU provide a 

pricing opinion. FINRA staff stated that 

they were unaware of instances where 

QIUs have made recommendations that 

were inconsistent with pricing decisions 

by the book-running lead manager or 

lead placement agent. In addition, 

FINRA staff stated that they believe QIU 

pricing opinions in at-the-market 

offerings are of little to no value. Both 

commenters expressed strong support 

for eliminating the QIU pricing 

requirement.21

B. Escrow of Proceeds; Net Capital 

Computation 

Proposed Rule 2720(b)(1) would 

require that all proceeds from a public 

offering by a member of its securities be 

placed in a duly established escrow 

account and not be released therefrom 

or used by the member in any manner 

until the member has complied with the 

net capital requirements set forth in 

paragraph (b)(2). This proposed 

provision mirrors current Rule 

2720(e).22

The net capital requirements set forth 

in proposed Rule 2720(b)(2) mirror 

current Rule 2720(e)(2), except that 

FINRA is proposing to replace the 

reference to Exchange Act Rule 15c3– 

1(f) with a reference in proposed Rule 

2720(b)(2) to the alternative standard for 

calculating net capital under Exchange 

Act Rule 15c3–1(a)(1)(ii). 

In addition, proposed Rule 2720(b)(3) 

would require that any member offering 

its securities pursuant to the proposed 

Rule disclose in the registration 

statement, offering circular, or similar 

document a date by which the offering 

is reasonably expected to be completed 

and the terms upon which the proceeds 

will be released from the escrow 

account described in paragraph (b)(1). 

This provision mirrors current Rule 

2720(d)(1). 

C. Disclosure 

Current Rule 2720(d)(1) requires 

disclosure in the registration statement 

or offering circular regarding the date 

the offering will be completed and the 

terms upon which proceeds will be 

released from the escrow account. 

Current Rule 2720(d)(2) requires 

disclosure: (1) That the offering is being 

made pursuant to Rule 2720; (2) 

Relating to the member’s status in the 

offering; and (3) Relating to the QIU (if 

one is required). 

The proposed rule change would 

delete current paragraph (d) of Rule 

2720. As discussed above, the proposal 

would move the disclosure 

requirements in current paragraph (d)(1) 

to proposed paragraph (b)(3) and 

establish separate disclosure 

requirements for public offerings in 

which a QIU participates (proposed 

Rule 2720(a)(2)(B)) and public offerings 

in which a QIU does not participate 

(proposed Rule 2720(a)(1)). 

D. Discretionary Accounts 

Proposed Rule 2720(c) would 

prohibit, notwithstanding NASD Rule 

2510 (Discretionary Accounts), members 

that have a conflict of interest from 

selling to a discretionary account any 

security with respect to which the 

conflict exists, unless the member has 

received specific written approval of the 

transaction from the account holder and 

retains documentation of the approval 

in its records. This provision differs 

from current Rule 2720(l), which also 

places limitations on sales to 

discretionary accounts, in that proposed 

Rule 2720(c) would only apply to the 

sale of securities by the member with 

the conflict of interest. Current Rule 

2720(l) limits discretionary sales by all 

firms participating in the offering, even 

those that do not have a conflict of 

interest. One commenter expressed 

support for limiting this provision to the 

member that has a conflict.23 FINRA has 

clarified that the ‘‘specific written 

approval’’ requirement in this provision 

could be satisfied by an e-mail from the 

customer. 

E. Application of Rule 5110 

As noted above, proposed Rule 

2720(d) would provide that any public 

offering subject to the QIU requirements 

of paragraph (a)(2) would also be subject 

to Rule 5110, whether or not the offering 

would otherwise be exempted from Rule 

5110’s filing or other requirements. Rule 

5110 generally requires members to file 

with FINRA public offerings for review 

of the proposed underwriting terms and 

arrangements. Rule 5110 contains 

certain exemptions from the filing 

requirements for, among others, public 

offerings of the securities of seasoned 

issuers and offerings of investment 

grade debt.24 However, pursuant to 

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29258 Federal Register / Vol. 74, No. 117 / Friday, June 19, 2009 / Notices 

trading volume of three million shares). The 

proposed shelf amendments (see supra note 14) 

would preserve the current filing requirements and 

amend the Rule to specifically describe the preOctober 21, 1992 standards. 

25SIFMA Letter. 

26ABA Letter. 27 Id. 

28SIFMA Letter. 

29 Id. 

current Rule 2720(m), these exemptions 

are inapplicable to public offerings that 

fall within the scope of Rule 2720. Thus, 

for example, while a public offering of 

the securities of a seasoned issuer is 

normally exempt from filing under Rule 

5110, if a member participating in the 

offering has a conflict of interest with 

the seasoned issuer, it must be filed and 

comply with Rule 5110. The proposed 

rule change would narrow this filing 

requirement to apply only to those 

public offerings that fall within the 

scope of proposed Rule 2720(a)(2). 

In response to comments on the 

original proposal,25 FINRA proposed to 

amend current Rule 5110(b)(7), which 

lists offerings that are exempt from the 

Rule 5110 filing requirements, to specify 

that documents and information related 

to the public offerings listed in Rule 

5110(b)(7) are not required to be filed 

with FINRA for review, unless the 

public offering is subject to the QIU 

requirements of Rule 2720(a)(2). This 

would clarify that if a public offering 

listed in Rule 5110(b)(7) is subject to 

Rule 2720(a)(1), such offering would not 

be subject to the filing requirements of 

Rule 5110. 

F. Requests for Exemption From Rule 

2720 

Proposed Rule 2720(e) would permit, 

pursuant to the Rule 9600 Series, FINRA 

in exceptional and unusual 

circumstances, taking into consideration 

all relevant factors, to exempt a member 

unconditionally or on specified terms 

from any or all of the provisions of the 

proposed Rule that it would deem 

appropriate. This provision mirrors 

existing Rule 2720(o). 

G. Definition of ‘‘Affiliate’’ 

Proposed Rule 2720(f)(1) would 

define the term ‘‘affiliate’’ as an entity 

that controls, is controlled by or is 

under common control with a member. 

While current Rule 2720(b)(1) 

incorporates the ‘‘control’’ standard in 

the definition of affiliate, FINRA 

proposed instead to adopt a separate 

definition of ‘‘control,’’ which is 

discussed below. 

In response to comments on the 

original proposal,26 FINRA narrowed 

the proposed definition of ‘‘affiliate’’ to 

apply only where an entity controls, is 

controlled by or is under common 

control with a member. As originally 

proposed, the definition would have 

applied where an entity was under 

common control with another entity 

that controls, was controlled by or was 

under common control with a member. 

H. Definition of ‘‘Beneficial Ownership’’ 

Proposed Rule 2720(f)(2) would 

define ‘‘beneficial ownership’’ as the 

right to the economic benefits of a 

security. This provision mirrors the 

definition contained in current Rule 

2720(b)(2). In NASD Notice to Members 

06–52, FINRA requested comment on 

whether Rule 2720 should incorporate 

the definition of ‘‘beneficial ownership’’ 

found in Exchange Act Rule 13d–3. That 

definition includes the right to dispose 

and vote the securities, which would 

apply to many investment funds. In 

response to comments suggesting that 

the definition should be confined to 

economic interests in which the 

member can profit directly,27 FINRA is 

proposing to retain the current 

definition of ‘‘beneficial ownership.’’ 

I. Definition of ‘‘Common Equity’’ 

Proposed Rule 2720(f)(4) would 

define ‘‘common equity’’ as the total 

number of shares of common stock 

outstanding without regard to class, 

whether voting or non-voting, 

convertible or non-convertible, 

exchangeable or non-exchangeable, 

redeemable or non-redeemable, as 

reflected on the consolidated financial 

statements of the company. This 

definition mirrors current Rule 

2720(b)(5). 

J. Definition of ‘‘Conflict of Interest’’ 

Proposed Rule 2720(f)(5) would 

define ‘‘conflict of interest’’ to be the 

situation where, at the time of a 

member’s participation in an entity’s 

public offering, any of four conditions 

applies. The proposed Rule would 

operate much as it does currently. 

However, the proposed rule change 

would relocate many of the current 

Rule’s substantive concepts to the 

definition of ‘‘conflict of interest.’’ 

First, pursuant to proposed Rule 

2720(f)(5)(A), a conflict of interest 

would exist if the securities are to be 

issued by the member. 

Second, pursuant to proposed Rule 

2720(f)(5)(B), a conflict of interest 

would exist if the issuer controls, is 

controlled by, or is under common 

control with the member or the 

member’s associated persons. ‘‘Control’’ 

is defined in proposed Rule 2720(f)(6) 

and is discussed below. 

Third, pursuant to proposed Rule 

2720(f)(5)(C), a conflict of interest 

would exist where at least five percent 

of the net offering proceeds, not 

including underwriting compensation, 

are intended to be either used to reduce 

or retire the balance of a loan or credit 

facility extended by the member, its 

affiliates, and its associated persons (in 

the aggregate) or otherwise directed to 

the member, its affiliates, and associated 

persons (in the aggregate). In response to 

comments on the original proposal,28

FINRA amended the proposed 

definition to clarify that the proceeds 

are net of underwriting compensation. 

Currently, Rule 5110(h) requires 

public offerings in which ten percent or 

more of the offering proceeds (not 

including the underwriting discount) 

will be paid to participating members to 

comply with Rule 2720’s QIU 

requirements. Pursuant to this proposed 

rule change, FINRA proposed to delete 

Rule 5110(h) and move the proceeds 

requirement to Rule 2720 by defining 

‘‘conflict of interest’’ to include a 

member’s participation in a public 

offering where proceeds are directed to 

the member. Although the threshold for 

proceeds directed to a member would be 

lowered from ten percent to five 

percent, the new threshold would apply 

to each participating member 

individually (including the member’s 

affiliates and its associated persons), not 

on an aggregate basis for all 

participating members, as is currently 

the case. Thus, for example, a conflict 

of interest would exist where a member 

received five percent of the proceeds, 

but not where two unaffiliated members 

each received three percent of the 

proceeds. 

Fourth, pursuant to proposed Rule 

2720(f)(5)(D), a conflict of interest 

would exist if, as a result of the public 

offering and any transactions 

contemplated at the time of the public 

offering, the member will be an affiliate 

of the issuer, the member will become 

publicly owned, or the issuer will 

become a member or form a brokerdealer subsidiary. 

In response to comments on the 

original proposal,29 FINRA clarified that 

for purposes of Rule 2720, 

‘‘participation in a public offering’’ has 

the same meaning as in Rule 5110. Rule 

5110(a)(5) provides that ‘‘participation 

or participating in a public offering’’ 

means: 

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 

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30Rule 5110(a)(5). Pursuant to the proposed shelf 

amendments (see supra note 15), this definition in 

former NASD Rule 2710 (which has since been 

moved to the Consolidated FINRA Rulebook as Rule 

5110) would be amended to specify participation in 

the distribution of the offering on an ‘‘underwritten, 

non-underwritten, principal, agency or any other 

basis’’ and to include ‘‘participation in a shelf 

takedown.’’ 

31Proposed Rule 2720(f)(6)(A)(i). The term 

‘‘beneficial ownership’’ is defined in proposed 

paragraph (f)(2). 

32Proposed Rule 2720(f)(6)(A)(ii). 

33Proposed Rule 2720(f)(6)(A)(iii). 

34Proposed Rule 2720(f)(6)(A)(iv). 

35Proposed Rule 2720(f)(6)(A)(v). 

36See current Rule 2720(b)(7)(A) and (C). 

37For purposes of Rule 2720, ‘‘participation in a 

public offering’’ has the same meaning as in Rule 

5110(a)(5). See supra for further discussion of the 

definition of the term ‘‘participation in a public 

offering.’’ 

38See ABA Letter (requesting that FINRA clarify 

whether the amount of securities to be received by 

a member and any other person within 60 days of 

the offering will be included in the denominator in 

order to calculate the member’s total ownership 

interest in the issuer’s securities). 

39Proposed Rule 2720(f)(7)(B)(i). 

40Proposed Rule 2720(f)(7)(B)(ii). 

41Proposed Rule 2720(f)(7)(B)(iii). 

42Proposed Rule 2720(f)(7)(B)(iv). 

43SIFMA Letter. 

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 

[Exchange Act] Rule 13e–3.30

K. Definition of ‘‘Control’’ 

As noted above, under the current 

Rule, the control standard is 

incorporated in the definition of 

‘‘affiliate.’’ The proposal would create a 

separate definition of ‘‘control,’’ which 

would be defined as any of the 

following: (1) Beneficial ownership of 

ten percent or more of the outstanding 

common equity of an entity, including 

any right to receive such securities 

within 60 days of the member’s 

participation in the public offering; 31

(2) The right to ten percent or more of 

the distributable profits or losses of an 

entity that is a partnership, including 

any right to receive an interest in such 

distributable profits or losses within 60 

days of the member’s participation in 

the public offering; 32 (3) Beneficial 

ownership of ten percent or more of the 

outstanding subordinated debt of an 

entity, including any right to receive 

such subordinated debt within 60 days 

of the member’s participation in the 

public offering; 33 (4) Beneficial 

ownership of ten percent or more of the 

outstanding preferred equity of an 

entity, including any right to receive 

such preferred equity within 60 days of 

the member’s participation in the public 

offering; 34 or (5) The power to direct or 

cause the direction of the management 

or policies of an entity.35 FINRA 

believed it was important in 

subparagraph (i) to include entities 

other than corporations in order to 

expressly include conflicts that may 

arise in connection with the offerings of, 

for example, trusts. 

FINRA had originally proposed that 

the definition of control would 

eliminate ownership of subordinated 

debt and preferred equity as a basis for 

a conflict of interest.36 However, in 

response to comments from Commission 

staff, FINRA proposed to include 

beneficial ownership of ten percent or 

more of the outstanding common equity 

(which is defined expressly to include 

non-voting stock), subordinated debt or 

preferred equity in the proposed 

definition of control. Thus, for example, 

‘‘control’’ could derive from the 

restrictive covenants typically found in 

debt indentures, preferred rights to 

dividends given to holders of nonvoting common or preferred stock or 

special voting rights given to certain 

classes of (generally) non-voting stock. 

While FINRA specifically requested 

comment on whether such forms of 

ownership give rise to a conflict of 

interest and should be included in the 

proposed rule, no comments were 

received in regards to this filing. 

The proposed definition of control 

would not only include shares 

beneficially owned by a participating 

member, but also the right to receive 

such securities within 60 days of the 

member’s participation in the public 

offering. In its original filing of 

September 6, 2007, FINRA proposed 

that for purposes of this provision, 60 

days would be from the effective date of 

the offering. However, in Amendment 

No. 1, FINRA revised the proposed rule 

text to provide that the relevant time 

frame is ‘‘within 60 days of the 

member’s participation in the public 

offering.’’ 37 This would ensure that the 

Rule properly applies to takedowns 

from an effective shelf registration. 

FINRA stated their belief that the 

determination of control should be 

when the member participates in an 

offering, not the date that a registration 

statement for the offering is declared 

effective. 

Thus, under the proposed rule 

change, warrants or rights for voting 

securities that are exercisable within 60 

days of the member’s participation in 

the public offering would be included in 

the calculation of voting securities when 

determining whether control exists. In 

response to comments on the original 

proposal, FINRA clarified that in 

calculating the percentage beneficial 

ownership, it would be appropriate to 

include the potential ownership of 

shares in both the numerator and 

denominator.38 FINRA did not believe, 

however, that this calculation should 

include securities that could be received 

by all investors. Rather, FINRA clarified 

that the calculation would be limited to 

warrants or rights that are exercisable 

within 60 days and received by the 

participating member only and would 

not include warrants or rights held by 

other investors. 

L. Definition of ‘‘Entity’’ 

Currently, Rule 2720 does not contain 

a definition of ‘‘entity.’’ Pursuant to 

proposed Rule 2720(f)(7), an ‘‘entity’’ 

would be defined, for purposes of the 

definitions of affiliate, conflict of 

interest, and control under the Rule, as 

‘‘a company, corporation, partnership, 

trust, sole proprietorship, association or 

organized group of persons.’’ 

The proposed definition would 

expressly exclude: (1) An investment 

company registered under the 

Investment Company Act of 1940 

(‘‘Investment Company Act’’); 39 (2) A 

‘‘separate account’’ as defined in 

Section 2(a)(37) of the Investment 

Company Act; 40 (3) A ‘‘real estate 

investment trust’’ as defined in Section 

856 of the Internal Revenue Code; 41 and 

(4) A ‘‘direct participation program’’ as 

defined in NASD Rule 2810.42 These 

exclusions are substantially similar to 

the exemptions from the ‘‘conflict of 

interest’’ provisions contained in 

current Rule 2720(b)(7)(D). In response 

to comments on the original proposal,43

FINRA revised the proposed definition 

of ‘‘conflict of interest’’ to apply only to 

a public offering of an ‘‘entity.’’ 

M. Definition of ‘‘Preferred Equity’’ 

Proposed Rule 2720(f)(9) would 

define the term ‘‘preferred equity’’ as 

the aggregate capital invested by all 

persons in the preferred securities 

outstanding without regard to class, 

whether voting or non-voting, 

convertible or non-convertible, 

exchangeable or non-exchangeable, 

redeemable or non-redeemable, as 

reflected on the consolidated financial 

statements of the company. This 

definition mirrors current Rule 

2720(b)(12). 

N. Definition of ‘‘Public Offering’’ 

Proposed Rule 2720(f)(11) is 

substantively similar to the definition of 

‘‘public offering’’ in current Rule 

2720(b)(14) and would define the term 

as any primary or secondary offering of 

securities made pursuant to a 

registration statement or offering 

circular including exchange offers, 

rights offerings, offerings made pursuant 

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44 15 U.S.C. 77d(1), (2), and (6). 

45ABA Letter. 

46 15 U.S.C. 78c(a)(12). 

47ABA Letter. 

48Proposed Rule 2720(f)(12)(A). 

49Proposed Rule 2720(f)(12)(B). 

50Proposed Rule 2720(f)(12)(C). 

51Proposed Rule 2720(f)(12)(D). 52See proposed Rule 2720(f)(12)(E). 

to a merger or acquisition and all other 

securities offerings of any kind 

whatsoever. The proposed definition 

excludes from its scope any offering 

made pursuant to an exemption from 

registration under Sections 4(1), 4(2) or 

4(6) of the Securities Act of 1933 

(‘‘Securities Act’’),44 Securities Act Rule 

504, if the securities are ‘‘restricted 

securities’’ under Securities Act Rule 

144(a)(3), Securities Act Rule 505, or 

Securities Act Rule 506, and Securities 

Act Rule 144A or Regulation S. FINRA 

currently does not interpret an offering 

made pursuant to Regulation S to be 

within the scope of a ‘‘public offering’’ 

under this Rule and as such, proposed 

also to exclude these offerings from the 

definition. Additionally, in response to 

comments on the original proposal,45

FINRA amended the proposed 

definition of ‘‘public offering’’ to 

expressly exclude exempted securities 

as defined in Section 3(a)(12) of the 

Exchange Act,46 as in the current Rule. 

One commenter suggested that the 

proposed rule should provide an 

express exclusion for offerings made 

pursuant to Securities Act Rule 144A.47

FINRA agreed and added an express 

exclusion for offerings under Securities 

Act Rule 144A. FINRA also noted that 

it currently does not interpret an 

offering made pursuant to Securities Act 

Rule 144A to be within the scope of 

either Rule 5110 or Rule 2720. 

O. Definition of ‘‘Qualified Independent 

Underwriter’’ 

Proposed Rule 2720(f)(12) defines the 

term ‘‘qualified independent 

underwriter’’ as a member that meets 

five specified conditions. Specifically, 

the member must first not have a 

conflict of interest and must not be an 

affiliate of any member that has a 

conflict of interest.48 The Rule currently 

does not disqualify or prohibit a QIU 

from receiving proceeds from an 

offering. The proposed rule change 

would prohibit a QIU from receiving 

more than five percent of the offering 

proceeds because the receipt of such 

proceeds would disqualify a member 

from acting as a QIU because it would 

fall within the proposed definition of 

‘‘conflict of interest.’’ 

The second condition for being 

considered a QIU in the proposed Rule 

is the member could not beneficially 

own, as of the date of the member’s 

participation in the public offering, 

more than five percent of the class of 

securities that would give rise to a 

conflict of interest, including any right 

to receive any such securities 

exercisable within 60 days.49 Current 

Rule 2720(b)(15)(E) prohibits a member 

from acting as a QIU if it is an affiliate 

of the issuer or if it beneficially owns at 

least five percent of the equity, 

subordinated debt or partnership 

interest of the issuer. The proposed rule 

change would maintain these 

prohibitions. 

Third, the member would need to 

have agreed, in acting as a QIU, to 

undertake the legal responsibilities and 

liabilities of an underwriter under the 

Securities Act, specifically including 

those inherent in Section 11 thereof.50

The proposed provision mirrors current 

Rule 2720(b)(15)(F). 

Fourth, the member would need to 

have served as underwriter in at least 

three public offerings of a similar size 

and type during the three-year period 

immediately preceding the filing of the 

registration statement or the date of first 

sale in an offering for which there is no 

registration statement.51 This 

requirement would be deemed satisfied 

if, during the past three years, the 

member, with respect to a proposed 

public offering of debt securities, has 

acted as sole underwriter or bookrunning lead or co-manager of at least 

three public offerings of debt securities 

each with gross proceeds of not less 

than 25% of the anticipated gross 

proceeds of the proposed offering. With 

respect to a proposed public offering of 

equity securities, this requirement 

would be deemed satisfied if, during the 

past three years, the member has acted 

as sole underwriter or book-running 

lead or co-manager of at least three 

public offerings of equity securities (or 

of securities convertible into equity 

securities), each with gross proceeds of 

not less than 50% of the anticipated 

gross proceeds of the proposed offering. 

While FINRA specifically requested 

comment on whether the 50% threshold 

should be lowered if an equity offering 

is particularly large (e.g., over $1 

billion), no comments were received in 

regards to the filing. The proposed 

requirements would be similar those set 

forth in current Rule 2720(b)(15)(C). The 

proposal would, however, shorten the 

relevant period from five to three years 

and would impose, as discussed above, 

the requirement that a QIU must have 

acted as a managing underwriter in at 

least three similar offerings during that 

time. 

Additionally, Rule 2720(b)(15)(B) 

currently permits a member to serve as 

a QIU only if the member is a sole 

proprietorship and the sole proprietor 

has been actively engaged in the 

investment banking or securities 

business for the five-year period 

immediately preceding the filing of the 

registration statement, or is a 

corporation or partnership and a 

majority of its board of directors or 

general partners has been similarly 

engaged in the investment banking or 

securities business. The proposed rule 

change would eliminate the requirement 

regarding board or partner experience, 

since FINRA staff believed that the 

experience of the firm is more relevant. 

The fifth and final condition for being 

considered a QIU in the proposed Rule 

would be that the member’s associated 

persons in a supervisory capacity who 

are responsible for organizing, 

structuring, or performing due diligence 

with respect to corporate public 

offerings of securities could not have 

certain criminal or disciplinary 

histories.52 These associated persons 

could not have been convicted within 

ten years prior to the filing of the 

registration statement or the preparation 

of an offering circular in an offering 

without a registration statement of a 

violation of the anti-fraud provisions of 

the federal or state securities laws, or 

any rules or regulations promulgated 

thereunder, in connection with a 

registered or unregistered offering of 

securities. These associated persons also 

could not be subject to any order, 

judgment, or decree of any court of 

competent jurisdiction entered within 

ten years prior to the filing of the 

registration statement, or the 

preparation of an offering circular in an 

offering without a registration 

statement, permanently enjoining or 

restraining such person from engaging 

in or continuing any conduct or practice 

in violation of the anti-fraud provisions 

of the federal or state securities laws, or 

any rules or regulations promulgated 

thereunder in connection with a 

registered or unregistered offering of 

securities. Finally, these associated 

persons could not have been suspended 

or barred from association with any 

member by an order or decision of the 

Commission, any state, FINRA, or any 

other self-regulatory organization within 

ten years prior to the filing of the 

registration statement, or the 

preparation of an offering circular in an 

offering without a registration 

statement, for any conduct or practice in 

violation of the anti-fraud provisions of 

the federal or state securities laws, or 

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53 15 U.S.C. 77b(a)(8). 

54ABA Letter. 

55See current Rule 2720(f), (g), and (h). 

56ABA Letter. 

57 Id. 

58 In approving this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

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

59 15 U.S.C. 78o–3(b)(6). 

60 15 U.S.C. 78s(b)(2). 

61 17 CFR 200.30–3(a)(12). 

any rules, or regulations promulgated 

thereunder, or the anti-fraud rules of 

any self-regulatory organization in 

connection with a registered or 

unregistered offering of securities. The 

Rule currently prohibits an associated 

person’s involvement in the due 

diligence process in a supervisory 

capacity if that person has been subject 

to certain criminal and disciplinary 

actions pertaining to the offering of 

securities within five years prior to the 

filing of the registration statement. The 

proposed rule change, as described 

above, would lengthen this period from 

five to ten years. 

P. Definition of ‘‘Registration 

Statement’’ 

Proposed Rule 2720(f)(13) would 

define the term ‘‘registration statement’’ 

as a registration statement as defined by 

Section 2(a)(8) of the Securities Act,53

notification on Form 1A filed with the 

Commission pursuant to the provisions 

of Securities Act Rule 252, or any other 

document, by whatever name known, 

initiating a registration or similar 

process for an issue of securities which 

is required to be filed by the laws or 

regulations of any federal or state 

agency. This definition mirrors current 

Rule 2720(b)(16), except for technical 

changes to correct the references in the 

current Rule to Securities Act Section 

2(8) and Securities Act Rule 255. 

Q. Definition of ‘‘Subordinated Debt’’ 

Proposed Rule 2720(f)(14) would 

define ‘‘subordinated debt’’ to include 

debt of an issuer which is expressly 

subordinate in right of payment to (or 

with a claim on assets subordinate to) 

any existing or future debt of such 

issuer or all debt that is specified as 

subordinated at the time of issuance. 

Subordinated debt would not include 

short-term debt with maturity at 

issuance of less than one year and 

secured debt and bank debt not 

specified as subordinated debt at the 

time of issuance. This definition mirrors 

current Rule 2720(b)(18). 

R. Deleted Definitions 

Proposed Rule 2720 would not 

include definitions for some terms that 

appear in current Rule 2720. These 

would be the definitions for 

‘‘company,’’ ‘‘effective date,’’ 

‘‘immediate family,’’ ‘‘parent,’’ 

‘‘person,’’ ‘‘public director,’’ and 

‘‘settlement.’’ In response to comments 

on the original proposal,54 FINRA 

proposed to adopt the current Rule 2720 

definitions of ‘‘company,’’ ‘‘effective 

date,’’ ‘‘immediate family,’’ and 

‘‘person’’ as new paragraphs (a)(11) 

through (14) of Rule 5110 because they 

are used in that rule. Proposed Rule 

2720(f) provides that the definitions in 

Rule 5110 are incorporated by reference 

in Rule 2720. 

S. Corporate Governance and Periodic 

Reporting 

Rule 2720 currently includes certain 

provisions that do not apply to the 

public offering itself and instead require 

the issuer to adopt corporate governance 

policies relating to an audit committee, 

public directors, and to issue periodic 

reports to shareholders.55 With the 

enactment of the Sarbanes-Oxley Act of 

2002 and recent SEC rulemaking and 

interpretive actions, FINRA enunciated 

its belief that issuers’ periodic reporting 

requirements under the Exchange Act 

have been enhanced and listing 

standard changes intended to improve 

corporate governance and enhance the 

role of audit committees have been 

adopted. Accordingly, FINRA decided 

that separate Rule 2720 requirements for 

corporate governance and periodic 

reporting would be unnecessary. One 

commenter expressed support for 

eliminating these provisions from Rule 

2720.56

T. Intrastate Offerings 

Rule 2720(j) currently requires any 

member offering its securities pursuant 

to the intrastate offering exemption 

under the Securities Act to include in 

the offering documents information 

required in a release that the 

Commission published in 1972. The 

proposed amendments would delete 

this requirement from Rule 2720. FINRA 

stated their belief that disclosure 

requirements for unregistered offerings 

should be addressed in a more 

comprehensive manner by the 

Commission, the states, or FINRA, and 

not imposed under the narrow scope of 

Rule 2720 or limited to intrastate 

offerings. One commenter suggested that 

FINRA should not adopt disclosure 

requirements for intrastate offerings 

because such offerings are subject to the 

disclosure requirements of the state 

where the securities are offered.57

U. Suitability 

Rule 2720(k) currently requires that 

every member underwriting an issue of 

its own securities, or securities of an 

affiliate or company with which it has 

a conflict of interest, that recommends 

to a customer the purchase of a security 

of such issue must have reasonable 

grounds to believe that the 

recommendation is suitable for the 

customer. FINRA did not propose a 

similar provision in proposed Rule 2720 

because NASD Rule 2310 already 

addresses a member’s obligations 

relating to suitability. 

III. Discussion and Findings 

After careful review of the proposed 

rule change, the Commission finds that 

the proposed rule change is consistent 

with the requirements of the Act, and 

the rules and regulations thereunder 

that are applicable to a national 

securities association.58 In particular, 

the Commission believes that the 

proposed rule change is consistent with 

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

the Act,59 which requires, among other 

things, that FINRA rules be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. The Commission 

believes that FINRA has substantially 

streamlined the Rule thus enhancing its 

members’ ability to comply with the 

rule while maintaining investor 

protections. The Rule, as amended in 

the proposal, continues regulation that 

protects investors in offerings where the 

member has a conflict of interest. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,60 that the 

proposed rule change (File No. SR– 

FINRA–2007–009), as modified by 

Amendment No. 1, be, and hereby is, 

approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.61

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–14367 Filed 6–18–09; 8:45 am] 

BILLING CODE 8010–01–P 

SOCIAL SECURITY ADMINISTRATION 

[Docket No. SSA–2009–0033] 

Occupational Information Development 

Advisory Panel Meeting 

AGENCY: Social Security Administration 

(SSA). 

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