[Federal Register Volume 62, Number 176 (Thursday, September 11, 1997)]
[Notices]
[Pages 47857-47858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24137]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39021; File No. SR-NASD-97-45]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Approving Proposed Rule Change Relating to
Modifications to the Definition of Qualified Independent Underwriter
September 4, 1997.
I. Introduction
On June 26, 1997, the National Association of Securities Dealers,
Inc., (``NASD'' or ``Association'') filed with the Securities and
Exchange Commission (``Commission'' or ``SEC'') pursuant to Section
19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule
19b-4 thereunder,\2\ a proposed rule change relating to modifications
to the definition of ``qualified independent underwriter.'' The
proposed rule change was published for comment in Securities Exchange
Act Release No. 38833 (July 11, 1997), 62 FR 38333 (July 17, 1997). The
Commission received no comments on the proposal. This order approves
the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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II. Description of the Proposal
NASD is proposing to amend Rule 2720, Distribution of Securities of
Members and Affiliates--Conflicts of Interest, that regulates the
conduct of offerings by members of their own securities, those of the
member's parent, or an affiliate, and other offerings in which a member
has a conflict of interest.
When a member proposes to participate in the distribution of a
public offering of its own or an affiliate's securities, or of
securities of a company with which it otherwise has a conflict of
interest, NASD Rule 2720 requires that the price at which an equity
issue or the yield at which a debt issue is to be distributed to the
public be established at a price no higher or a yield no lower than
that recommended by a member acting as a ``qualified independent
underwriter.'' The qualified independent underwriter must also
participate in the preparation of the offering document and is expected
to exercise the usual standards of due diligence in respect thereto.
The participation of a qualified independent underwriter is intended to
assure the public of the independence of the pricing and due diligence
functions in a situation where a member is participating in an offering
where the member has a conflict of interest.
The NASD is proposing to delete the requirement that a qualified
independent underwriter has had net income from operations of the
broker/dealer entity or from the pro forma combined operations of
predecessor broker/dealer entities, exclusive of extraordinary items,
as computed in accordance with generally accepted accounting
principles, in at least three of the five years immediately preceding
the filing of the registration statement.
III. Discussion
The Commission believes the NASD's proposed rule change is
consistent with the Act, and specifically with Section 15A(b)(6)
thereunder.\3\ Section 15A(b)(6) requires that the rules of a national
securities association be designed to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
[[Page 47858]]
securities, and to remove impediments to and perfect the mechanism of a
free and open market.\4\
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\3\ 15 U.S.C. 78o-3.
\4\ In approving this rule, the Commission notes that it has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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The NASD is proposing to delete the eligibility criteria contained
in the definition of ``qualified independent underwriter'' in NASD Rule
2720, which requires a qualified independent underwriter to have
recorded net income in three of the five years immediately preceding
the offering. Due to the important investor protections provided by
qualified independent underwriters, the Commission agrees with the
NASD's assessment that qualified independent underwriters should meet
certain standards as prescribed by the NASD in Rule 2720, however, the
Commission believes the requirement that a qualified independent
underwriter have had net income in three of the previous five years
immediately preceding an offering does not specifically indicate a
member's ability to act as a qualified independent underwriter. The
Commission believes that other factors, including a member's actual
experience in underwriting, may be more significant in determining
eligibility as a qualified independent underwriter. In its proposed
rule change, the NASD noted that the Hearing Subcommittees of the
NADS's Corporate Financing Committee have granted the majority of
requests received seeking an exemption from the proposed qualified
independent underwriter net income requirement, relying instead, on
members' extensive underwriting experience managing or co-managing
public offerings to compensate for any lack of ongoing profitability.
The Commission recognizes that the net income requirement, in some
instances, may serve as an effective measure for qualified independent
underwriters. However, the Commission also notes that a deficiency in
net income may be the result of various situations, many of which are
not directly connected to the profitability of a member's underwriting
activities. Indeed, in its filing, the NASD noted that one national
broker-dealer failed the net income requirement due to its settlement
of sales practice abuses in connection with the distribution of
noncorporate securities, an activity unrelated to its ability to serve
as a qualified independent underwriter.
The Commission believes that the participation of a qualified
independent underwriter assures the public of the independence of the
pricing and due diligence functions in a situation where a member is
participating in an offering where such member has a conflict of
interest. Because of the important investor protections provided by
qualified independent underwriters in such an instance, the Commission
believes certain criteria must be met to assure the credibility of
those acting as qualified independent underwriters. The Commission
believes the elimination of the net income requirement is appropriate,
as such requirement does not appropriately reflect a member's ability
to act as a qualified independent underwriter. The Commission further
believes the remaining standards provided in NASD Rule 2720 are more
relevant in assessing a member's qualifications in the capacity as a
qualified independent underwriter.
IV. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change is consistent with the Act and the rules and regulations
thereunder applicable to the NASD, and in particular Section 15A(b)(6).
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\5\ that the proposed rule change (File No. SR-NASD-97-45) be and
hereby is approved.
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\5\ 15 U.S.C. 78s(b)(2).
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24137 Filed 9-10-97; 8:45 am]
BILLING CODE 8010-01-M