Document ID: SEC-2007-0113-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2007-01-25T05:00Z

[Federal Register: January 25, 2007 (Volume 72, Number 16)]
[Notices]               
[Page 3453-3455]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25ja07-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55128; File No. SR-NASD-2006-074]

 
Self-Regulatory Organizations: National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to the 
Application of NASD Rule 2790 to Issuer-Directed Securities

January 18, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 12, 2006, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by NASD. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rule 2790 to expand the exemption 
for securities that are directed by the issuer to include offerings 
sold entirely on a non-underwritten basis, where no broker-dealer 
solicits or sells any new issue securities in the offering, and where 
no broker-dealer has any involvement or influence, directly or 
indirectly, in the issuer's allocation decisions with respect to any of 
the new issue securities in the offering. NASD also is proposing to 
amend Rule 2790 to prohibit the allocation of issuer-directed 
securities to broker-dealers. Below is the text of the proposed rule 
change. Proposed new language is in italics; proposed deletions are in 
[brackets].
* * * * *

2790. Restrictions on the Purchase and Sale of Initial Equity Public 
Offerings

    (a) through (c) No Change.
    (d) Issuer-Directed Securities.
    The prohibitions on the purchase and sale of new issues in this 
rule shall not apply to securities that:
    (1) Are specifically directed by the issuer to persons that are 
restricted under the rule; provided, however, that securities directed 
by an issuer may not be sold to or purchased by:
    (A) A broker-dealer; or
    (B) An account in which any restricted person specified in 
subparagraphs (i)(10)(B) or (i)(10)(C) of this rule has a beneficial 
interest, unless such person, or a member of his or her immediate 
family, is an employee or director of the issuer, the issuer's parent, 
or a subsidiary of the issuer or the issuer's parent. Also, for 
purposes of this paragraph (d)(1) only, a parent/subsidiary 
relationship is established if the parent has the right to vote 50% or 
more of a class of voting security of the subsidiary, or has the power 
to sell or direct 50% or more of a class of voting security of the 
subsidiary;
    (2) Are specifically directed by the issuer and are part of an 
offering in which no broker-dealer:
    (A) Underwrites any portion of the offering;
    (B) Solicits or sells any new issue securities in the offering; and
    (C) Has any involvement or influence, directly or indirectly, in 
the issuer's allocation decisions with respect to any of the new issue 
securities in the offering;
    (3) [(2)] Are part of a program sponsored by the issuer or an 
affiliate of the issuer that meets the following criteria:
    (A) The opportunity to purchase a new issue under the program is 
offered to at least 10,000 participants;
    (B) Every participant is offered an opportunity to purchase an 
equivalent number of shares, or will receive a specified number of 
shares under a predetermined formula applied uniformly across all 
participants;
    (C) If not all participants receive shares under the program, the 
selection of the participants eligible to purchase shares is based upon 
a random or other non-discretionary allocation method; and
    (D) The class of participants does not contain a disproportionate 
number of restricted persons as compared to the investing public 
generally; or
    (4) [(3)] Are directed to eligible purchasers who are otherwise 
restricted under the rule as part of a conversion offering in 
accordance with the standards of the governmental agency or 
instrumentality having authority to regulate such conversion offering.
    (e) through (j) No Change.
* * * * *

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

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements

[[Page 3454]]

may be examined at the places specified in Item IV below. NASD has 
prepared summaries, set forth in sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
    Background. NASD Rule 2790 protects the integrity of the public 
offering process by ensuring that: (1) Members make bona fide public 
offerings of securities at the offering price; (2) members do not 
withhold securities in a public offering for their own benefit or use 
such securities to reward persons who are in a position to direct 
future business to members; and (3) industry insiders, including 
members and their associated persons, do not take advantage of their 
insider position to purchase new issues for their own benefit at the 
expense of public customers.
    NASD Rule 2790 provides that, except as otherwise permitted under 
the Rule, a member (or an associated person) may not sell a new issue 
to an account in which a restricted person has a beneficial interest, a 
member (or an associated person) may not purchase a new issue in any 
account in which such member or associated person has a beneficial 
interest, and a member may not continue to hold new issues acquired as 
an underwriter, selling group member, or otherwise.
    Exemption for Issuer-Directed Non-Underwritten Offerings. NASD has 
long recognized that an issuer's ability to direct shares to investors 
is a valuable tool in employee development and retention (often an 
integral part of the employer-employee relationship), and often 
furthers the legitimate business interests of the issuer. As such, NASD 
historically has provided a tailored exemption for securities that are 
specifically directed by the issuer.
    Currently, Rule 2790(d)(1) states that the prohibitions on the 
purchase and sale of new issues in the Rule do not apply to new issue 
securities that are specifically directed by the issuer to restricted 
persons as defined in the Rule, provided that issuer-directed 
securities are not sold to or purchased by an account in which broker-
dealer personnel, finders and fiduciaries, or certain members of their 
immediate family have a beneficial interest,\3\ unless such persons, or 
members of their immediate family, are employees or directors of the 
issuer, the issuer's parent, or a subsidiary of the issuer or the 
issuer's parent. The inclusion of these heightened requirements in Rule 
2790(d)(1) is designed to ensure that such persons, who typically have 
the greatest potential to influence the IPO allocation process, have a 
demonstrated basis for being selected to purchase shares in the IPO. 
The issuer-directed exemption is applicable only when shares are in 
fact directed by an issuer (that is, a member cannot seek to have an 
issuer direct securities to restricted persons on the member's behalf 
under the exemption).
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    \3\ The term broker-dealer personnel includes, among others, any 
officer, director, general partner, associated person, and employee 
of a broker-dealer, as well as certain immediate family members of 
such persons. The term finders and fiduciaries, with respect to the 
security being offered, includes a finder or any person acting in a 
fiduciary capacity to the managing underwriter, including, but not 
limited to, attorneys, accountants, and financial consultants, as 
well as certain immediate family members of such persons. See NASD 
Rules 2790(i)(10)(B) and (i)(10)(C).
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    NASD recently received two requests for exemptive relief related to 
the issuer-directed exemption.\4\ Both requests came from banks that 
were eligible to offer their own securities pursuant to an exemption 
from registration under Section 3(a)(2) of the Securities Act of 1933. 
Both of these offerings were entirely on a non-underwritten basis,\5\ 
and all decisions regarding the allocation of shares in the offerings 
were determined at the sole discretion of the respective issuers. These 
issuers argued, and NASD staff agreed, that the heightened requirements 
of Rule 2790(d)(1) would impair their ability to attract capital and 
served no regulatory purpose in light of the fact that no broker-dealer 
was underwriting or otherwise involved in allocating any of the shares 
that were being offered. Further, Rule 2790 generally is predicated on 
a member's involvement in the allocation process. As such, NASD staff 
granted an exemption from Rule 2790 in connection with both offerings.
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    \4\ See Letter to Noel M. Gruber, Kennedy & Barris, LLP, from 
Afshin Atabaki, NASD, dated October 18, 2005 (``Gruber Letter'') 
(available at: http://www.nasd.com/web/[fxsp0]idcplg?IdcService=SS--

[fxsp0]GET--PAGE&ssDocName=NASDW--[fxsp0]015421&PrinterFriendly=1), 
and Letter to Bruce E. Lee from Afshin Atabaki, NASD, dated February 
3, 2006 (``Lee Letter'') (available at: http://www.nasd.com/web/[fxsp0
]idcplg?IdcService=SS--GET--P[fxsp0]AGE&ssDocName=NASDW--

[fxsp0]016098&PrinterFriendly=1).
    \5\ Although a member was involved in one of these offerings, 
the member's involvement in the offering was mandated under state 
law and limited solely to ministerial functions.
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    NASD is proposing to codify this position by amending Rule 2790(d) 
to provide that the prohibitions on the purchase and sale of new issues 
in Rule 2790 do not apply to securities that are specifically directed 
by the issuer to restricted persons, provided that a broker-dealer: (1) 
Does not underwrite any portion of the offering; (2) does not solicit 
or sell any new issue securities in the offering; and (3) has no 
involvement or influence, directly or indirectly, in the issuer's 
allocation decisions with respect to any of the new issue securities in 
the offering.
    Prohibition of Issuer-Directed Allocations to Broker-Dealers. NASD 
also is proposing to amend the issuer-directed provision in Rule 
2790(d)(1) to prohibit expressly issuer-directed allocations of new 
issues to a broker-dealer. NASD believes that issuer-directed 
allocations to a broker-dealer run contrary to the purposes of the 
Rule. As discussed above, Rule 2790(d)(1) permits allocations of new 
issue securities by the issuer to an account in which broker-dealer 
personnel, finders or fiduciaries, or certain members of their 
immediate family have a beneficial interest, if such persons, or 
members of their immediate family, are employees or directors of the 
issuer, the issuer's parent, or a subsidiary of the issuer or the 
issuer's parent. However, NASD does not see any corresponding basis to 
justify new issue allocations from the issuer to a broker-dealer. The 
conditions in Rule 2790(d)(1) generally are inapplicable to a broker-
dealer. Moreover, we have noted under the current Rule that to the 
extent that broker-dealer personnel have a beneficial interest in a 
broker-dealer, the broker-dealer would be subject to the limitations in 
Rule 2790(d)(1). The proposed rule change would establish a more direct 
prohibition against purchases of new issues by broker-dealers.
    NASD will announce the effective date of the proposed rule change 
in a Notice to Members (``NTM'') to be published no later than 60 days 
following Commission approval. The effective date will be 30 days 
following publication of the NTM announcing Commission approval.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\6\ which requires, among 
other things, that NASD's rules must 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. NASD believes that the proposed rule change strikes 
the correct

[[Page 3455]]

balance between providing issuers with flexibility to direct shares and 
improving the capital raising process while at the same time preserving 
the objectives of the Rule.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) As the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 rule-comments@sec.gov. Please include 

File Number SR-NASD-2006-074 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2006-074. 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. Copies of such 
filing also will be available for inspection and copying at the 
principal office of NASD.
    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-NASD-2006-074 
and should be submitted on or before February 15, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-1060 Filed 1-24-07; 8:45 am]

BILLING CODE 8011-01-P