Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to the NASD's Free-Riding and Withholding Interpretation

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34485; File No. SR-NASD-94-15]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by National Association of Securities Dealers, Inc. Relating to

the NASD's Free-Riding and Withholding Interpretation

August 3, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March

18, 1994, the National Association of Securities Dealers, Inc.

(``NASD'' or ``Association'') 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 the NASD. 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

The NASD is proposing to amend its Free-Riding and Withholding

Interpretation, an Interpretation of the NASD's Board of Governors

under Article III, Section 1 of the Association's Rules of Fair

Practice.\1\ Below is the text of the proposed rule change. Proposed

new language is in italics; proposed deletions are in brackets.

\1\NASD Manual, Rules of Fair Practice, Art. III, Sec. 1 (CCH)

2151.06.

---------------------------------------------------------------------------

``Free-Riding and Withholding'' Introduction

The following Interpretation of Article III, Section 1 of the

Association's Rules of Fair Practice is adopted by the Board of

Governors of the Association pursuant to the provisions of Article VII,

Section 3(a) of the Association's By-Laws and Article I, Section 3 of

the Rules of Fair Practice.

This Interpretation is based upon the premise that members have an

obligation to make a bona fide public distribution at the public

offering price of securities of a public offering which trade at a

premium in the secondary market whenever such secondary market begins

(a ``hot issue'') regardless of whether such securities are acquired by

the member as an underwriter, as a selling group member, or from a

member participating in the distribution as an underwriter or a selling

group or otherwise. The failure to make a bona fide public distribution

when there is a demand for an issue can be a factor in artificially

raising the price. Thus, the failure to do so, especially when the

member may have information relating to the demand for the securities

or other factors not generally known to the public, is inconsistent

with high standards of commercial honor and just and equitable

principles of trade and leads to an impairment of public confidence in

the fairness of the investment banking and securities business. Such

conduct is, therefore, in violation of Article III, Section 1 of the

Association's Rules of Fair Practice and this Interpretation thereof

which establishes guidelines in respect to such activity.

As in the case of any other Interpretation issued by the Board of

Governors of the Association, the implementation thereof is a function

of the District Business Conduct Committees and the Board of Governors.

Thus, the Interpretation will be applied to a given factual situation

by individuals active in the investment banking and securities business

who are serving on these committees or on the Board. They will construe

this Interpretation to effectuate its overall purpose to assure a

public distribution of securities for which there is a public demand.

The Board of Governors has determined that a member who makes an

allocation to a restricted person or account of an offering that trades

at a premium in the secondary market shall not be considered to have

violated this Interpretation if it cancels the allocations for such

restricted person or account, prior to the end of the first business

day following the date on which secondary market trading commences and

reallocates such security at the public offering price to an non-

restricted person or account.

Interpretation

Except as provided herein, it shall be inconsistent with high

standards of commercial honor and just and equitable principles of

trade and a violation of Article III, Section 1 of the Association's

Rules of Fair Practice for a member, or a person associated with a

member, to fail to make a bona fide public distribution at the public

offering price of securities of a public offering which trade at a

premium in the secondary market whenever such secondary market begins

regardless of whether such securities are acquired by the member as an

underwriter, a selling group member or from a member participating in

the distribution as an underwriter or selling group member, or

otherwise. Therefore, it shall be a violation of Article III, Section 1

for a member, or a person associated with a member, to:

1. Continue to hold any of the securities so acquired in any of the

member's accounts;

2. Sell any of the securities to any officer, director, general

partner, employee or agent of the member or of any other broker/dealer,

or to a person associated with the member or with any other broker/

dealer, or to a member of the immediate family of any such person;

provided however, that:

(a) This prohibition shall not apply to a person in a limited

registration category as that term is defined below; and

(b) The prohibition shall not apply to sales to a member of the

immediate family of a person associated with a member whose is not

supported directly or indirectly to a material extent by such person if

the sale is by a broker/dealer other than that employing the restricted

person and the restricted person has no ability to control the

allocation of the hot issue.

3. Sell any of the securities to a person who is a finder in

respect to the public offering or to any person acting in a fiduciary

capacity to the managing underwriter, including, among others,

attorneys, accountants and financial consultants, or to [a member of

the immediate family of any such person;] any other person who is

supported directly or indirectly, to a material extent, by any person

specified in this paragraph.

4. Sell any securities to any senior officer of a bank, savings and

loan institution, insurance company, [registered] investment company,

[registered] investment advisory firm or any other institutional type

account (including, but not limited to, hedge funds, investment

partnerships, investment corporations, or investment clubs), domestic

or foreign, or to any person in the securities department of, or to any

employee or any other person who may influence or whose activities

directly or indirectly involve or are related to the function of buying

or selling securities for any bank, savings and loan institution,

insurance company, [registered] investment company, [registered]

investment advisory firm, or other institutional type account, domestic

or foreign, or to [a member of the immediate family of any such

person;] any other person who is supported directly or indirectly, to a

material extent, by any person specified in this paragraph.

5. Sell any securities to any account in which any person specified

under paragraphs (1), (2), (3) or (4) hereof has a beneficial interest;

Provided, however, a member may sell part of its securities

acquired as described above to:

(a) persons enumerated in paragraphs (3) or (4) hereof; and

(b) members of the immediate family of persons enumerated in

paragraph (2) hereof provided that such person enumerated in paragraph

(2) does not contribute directly or indirectly to the support of such

member of the immediate family; and

(c) any account in which any person specified under paragraph (3)

or (4) or subparagraph (b) of this paragraph has a beneficial interest;

if the member is prepared to demonstrate that the securities were sold

to such persons in accordance with their normal investment practice

[with the member], that the aggregate of the securities so sold is

insubstantial and not disproportionate in amount as compared to sales

to members of the public and that the amount sold to any one of such

persons is insubstantial in amount.

6. Sell any of the securities, at or above the public offering

price, to any other broker/dealer; provided, however, a member may sell

all or part of the securities acquired as described above to another

member broker/dealer upon receipt from the latter in writing assurance

that such purchase would be made to fill orders for bona fide public

customers, other than those enumerated in paragraphs (1), (2), (3), (4)

or (5) above, at the public offering price as an accommodation to them

and without compensation for such.

7. Sell any of the securities to any domestic bank, domestic branch

of a foreign bank, trust company or other conduit for an undisclosed

principal unless:

(a) An affirmative inquiry is made of such bank, trust company or

other conduit as to whether the ultimate purchasers would be persons

enumerated in paragraphs (1) through (5) hereof and satisfactory

assurance is received that the ultimate purchasers would not be such

persons, and that the securities would not be sold in a manner

inconsistent with the provisions of paragraph (6) hereof; otherwise,

there shall be a rebuttable presumption that the ultimate purchasers

were persons enumerated in paragraphs (1) through (5) hereof or that

the securities were sold in a manner inconsistent with the provisions

of paragraph (6) hereof;

(b) A recording is made on the order ticket, or its equivalent, or

on some other supporting document, of the name of the person to whom

the inquiry was made at the bank, trust company or other conduit as

well as the substance of what was said by that person and what was done

as a result thereof;

(c) The order ticket, or its equivalent, is initialed by a

registered principal of the member; and

(d) Normal supervisory procedures of the member provide for a close

follow-up and review of all transactions entered into with the referred

to domestic bank, trust companies or other conduits for undisclosed

principals to assure that the ultimate recipients of securities so sold

are not persons enumerated in paragraphs (1) through (6) hereof.

8. Sell any of the securities to a foreign broker/dealer or bank

unless:

(a) In the case of a foreign broker/dealer or bank which is

participating in the distribution as an underwriter, the agreement

among underwriters contains a provision which obligates the said

foreign broker/dealer or bank not to sell any of the securities which

it receives as a participant in the distribution to persons enumerated

in paragraphs (1) through (5) above, or in a manner inconsistent with

the provisions of paragraph (6) hereof; or

(b) In the case of sales to a foreign broker/dealer or bank which

is not participating in the distribution as an underwriter, the selling

member:

(i) Makes an affirmative inquiry of such foreign broker/dealer

or bank as to whether the ultimate purchasers would be persons

enumerated in paragraphs (1) through (5) hereof and receives

satisfactory assurance that the ultimate purchasers of the

securities so purchased would not be such persons, and that the

securities would not be sold in a manner inconsistent with the

provisions of paragraph (6) hereof;

(ii) A recording is made on the order ticket, or its equivalent,

or upon some other supporting document, of the name of the person to

whom the inquiry was made at the foreign broker/dealer or bank as

well as the substance of what was said by that person and what was

done as a result thereof; and

(iii) The order ticket, or its equivalent, is initialed by a

registered principal of the member.

The obligations imposed upon members in their dealings with foreign

broker/dealers or banks by this paragraph 8(b) can be fulfilled by

having the foreign broker/dealer or bank to which sales falling within

the scope of this Interpretation are made execute Form RF-1, or a

reasonable facsimile thereof. This form, which gives a blanket

assurance from the foreign broker/dealer or bank that no sales will be

made in contravention of the provisions of this Interpretation, can be

obtained at any District Office of the Association or at the Executive

Office. The acceptance of an executed Form FR-1, or other written

assurance, by a member must in all instances be made in good faith.

Thus, if a member knows or should have known of facts which are

inconsistent with the representations received, such will not operate

to satisfy the obligations imposed upon him by this paragraph.

Scope and Intent of Interpretation

In addition to the obvious scope and intent of the above

provisions, the intent of the Board of Governors in the following

specific situations is outlined for the guidance of members.

Limited Business Broker/Dealer

The restrictions placed on associated persons pursuant to Paragraph

2 of the Interpretation shall not apply to persons associated with NASD

members engaged solely in the purchase or sale of either investment

company/variable contracts securities or direct participation program

securities.

Issuer Directed Securities

This Interpretation shall apply to securities which are part of a

public offering notwithstanding that some or all of those securities

are specifically directed by the issuer to accounts which are included

within the scope of paragraphs (3) through (8) above. Therefore, if a

person within the scope of those paragraphs to whom securities were

directed did not have the required [an] investment history [with the

member or registered representative from whom they were to be

purchased], the member would not be permitted to sell him such

securities. Also, the ``disproportionate'' and ``insubstantial'' tests

would apply as in all other situations. Thus, the directing of a

substantial number of securities to any one person would be prohibited

as would the directing of securities to such accounts in amounts which

would be disproportionate as compared to sales to members of the

public. If such issuer-directed securities are sold to the issuer's

employees or directors or potential employees or directors resulting

from an intended merger, acquisition, or other business combination,

such securities may be sold without limitation as to amount and

regardless of whether such employees have an investment history as

required by the Interpretation; provided, however, that in the case of

an offering of securities for which a bona fide independent market does

not exist, such securities shall not be sold, transferred, assigned,

pledged, or hypothecated for a period of three months following the

effective date of the offering. This Interpretation shall also apply to

securities which are part of a public offering notwithstanding that

some of those securities are specifically directed by the issuer on a

non-underwritten basis. In such cases, the managing underwriter of the

offering shall be responsible for insuring compliance with this

Interpretation in respect to those securities.

Notwithstanding the above, sales of issuer directed securities may

be made to non-employee/director restricted persons without the

required investment history after receiving permission from the Board

of Governors. Permission will be given only if there is a demonstration

of valid business reasons for such sales (such as sales to distributors

and suppliers [or key employees], who are in each case incidentally

restricted persons), and the member seeking permission is prepared to

demonstrate that the aggregate amount of securities so sold is

insubstantial and not disproportionate as compared to sales to members

of the public, and that the amount sold to any one of such persons is

insubstantial in amount; provided, however, that such securities shall

not be sold, transferred, assigned, pledged, or hypothecated for a

period of three months following the effective date of the offering.

Stand-By Purchasers

Securities purchased pursuant to a stand-by arrangement shall not

be subject to the provisions of the Interpretation if the following

conditions are met:

1. The stand-by agreement is disclosed in the prospectus.

2. The stand-by arrangement is the subject of a formal written

agreement.

3. The managing underwriter represents in writing that it was unable to

find any other purchasers for the securities.

4. The securities purchased shall be restricted from sale or transfer

for a period of three months.\2\

\2\When the securities are sold by stand-by purchasers, the

stand-by purchasers would need to comply with all applicable

regulatory requirements including prospectus delivery pursuant to

Section 5 of the Securities Act of 1933 (``Securities Act'').

---------------------------------------------------------------------------

Investment Partnerships and Corporations

A member may not sell [securities of a public offering which trade

at a premium in the secondary market whenever such secondary market

begins (``hot issue''),] a hot issue to the account of any investment

partnership or corporation, domestic or foreign (except companies

registered under the Investment Company Act of 1940) including but not

limited to, hedge funds, investment clubs, and other like accounts

unless the member complies with either of the following alternatives:

(A) prior to the execution of the transaction, the member has

received from the account a current list of the names and business

connections of all persons having any beneficial interest in the

account, and if such information discloses that any person [enumerated

in paragraphs (1) through (4) hereof] restricted under this

Interpretation has a beneficial interest in such account, any sale of

securities to such account must be consistent with the provisions of

this Interpretation, or

(B) prior to the execution of the transaction, the member has

obtained a copy of a written representation [current opinion] from

counsel admitted to practice law before the highest court of any state

or the account's independent certified public accountant stating that

such counsel or accountant reasonably believes that no person with a

beneficial interest in the account is a restricted person under this

Interpretation and stating that, in providing such [opinion]

representation, counsel or accountant:

(1) Has reviewed and is familiar with this Interpretation;

(2) Has reviewed a current list of all persons with a beneficial

interest in the account supplied by the account manager;

(3) Has reviewed information supplied by the account manager with

respect to each person with a beneficial interest in the account,

including the identity, the nature of employment, and any other

business connections of such persons; and

(4) has requested and reviewed other documents and other pertinent

information and made inquiries of the account manager and received

responses thereto, if counsel or the accountant determines that such

further review and inquiry are necessary and relevant to determine

the correct status of such persons under the Interpretation.

The member shall maintain a copy of the names and business

connections of all persons having any beneficial interest in the

account or a copy of the current [opinion of counsel] written

representation in its files for at least three years following the

member's last sale of a new issue to the account, depending upon which

of the above requirements the member elects to follow. For purposes of

this section, a list or [opinion] written representation shall be

deemed to be current if it is based upon the status of the account as

of a date not more than 18 months prior to the date of the transaction.

Beneficial Interest

The term beneficial interest means not only ownership interests,

but every type of direct financial interest of any persons enumerated

in paragraphs (1) through (4) hereof in such account [, including,

without limitation, management fees based on the performance of the

account].

Provided, however, that no restricted person shall be deemed to

have a beneficial interest in an account receiving a hot issue as a

result of ownership of an interest in an investment partnership or

corporation, or similar type account (``investment entity''), if the

following conditions are met.

1. The investment entity establishes a separate brokerage account,

with a separate identification number, for its new-issue purchases. At

the end of each fiscal year, the general partner, or similarly situated

party, will certify in writing to its independent certified public

accountants that: (a) all hot issues purchased by the investment entity

were placed in this new-issue account; and (b) that the participants in

the new-issue account are not restricted persons under this

Interpretation.

2. Prior to the execution of the initial hot issue transaction, the

investment entity's accountant or attorney will provide a written

representation that complies with paragraph B of the section of this

Interpretation entitled ``Investment Partnerships and Corporations.''

3. As part of its audit procedure for the investment entity, the

indendent certified public accountant will confirm in writing to the

investment entity that all allocations for the new-issue account were

made in accordance with the provisions of the applicable investment

entity agreement that restricts participation in hot issue purchases.

4. The investment entity will maintain in its files copies of the

certifications, representations, and confirmations referred to in

paragraphs (1)-(3) above for at least three years following the last

purchase of a hot issue for the new-issue account.

5. The investment entity will accept investment funds from other

investment entities only if such other accounts provide the same

documentation and assurances described in paragraphs (1)-(4) above that

restricted persons will not participate in the purchase of hot issues.

6. The certifications and documents required in paragraphs (1)-(3)

above shall be provided to the member holding such account at such time

as these certifications and documents are filed with the investment

entity and its independent certified public accountant and, the member

shall make such documentation available to the NASD upon request.

Venture Capital Investors

This Interpretation shall not prohibit the sale of hot issues in an

initial public offering to a person restricted under the Interpretation

or to an account in which such restricted person has a beneficial

interest (a ``Venture Capital Investor'') if the following conditions

are met:

1. The Venture Capital Investor has held an ownership interest in

the company issuing the hot issue securities for a period of one year

prior to the effective of the public offering;

2. The acquisition of the hot issue securities in the public

offering does not increase the percentage equity ownership of the

Venture Capital Investor in the company above that held three months

prior to the filing of the registration statement in connection with

the offering;

3. The Venture Capital Investor received no special terms in

connection with the purchase; and

4. The securities purchased shall be restricted from sale or

transfer for a period of three months following the conclusion of the

offering.

Violations by Recipient

In those cases where a member or person associated with a member

has been the recipient of securities of a public offering to the extent

that such violated the Interpretation, the member or person associated

with a member shall be deemed to be in violation of Article III,

Section 1 of the Rules of Fair Practice and this Interpretation as well

as the member who sold the securities since their responsibility in

relation to the public distribution is equally as great at that of the

member selling them. In those cases where a member or a person

associated with a member has caused, directly or indirectly, the

distribution of securities to a person falling within the restrictive

provisions of this Interpretation the member or person associated with

a member shall also be deemed to be in violation of Article III,

Section 1 of the Rules of Fair Practice and this Interpretation.

Receipt by a member or a person associated with a member of securities

of a hot issue which is being distributed by an issuer itself without

the assistance of an underwriter and/or selling group is also intended

to be subject to the provisions of this Interpretation.

Violations by Registered Representative Executing Transaction

The obligation which members have to make a bona fide public

distribution at the public offering price of securities of a hot issue

is also an obligation of every person associated with a member who

causes a transaction to be executed. Therefore, where sale are made by

such persons in a manner inconsistent with the provisions of this

Interpretation, such persons associated with a member will be

considered equally culpable with the member for the violations found

taking into consideration the facts and circumstances of the particular

case under consideration.

Disclosure

The fact that a disclosure is made in the prospectus or offering

circular that a sale of securities would be made in a manner

inconsistent with this Interpretation does not take the matter out of

its scope. In sum, therefore, disclosure does not affect the

proscriptions of this Interpretation.

Explanation of terms

The following explanation of terms is provided for the assistance

of members. Other words which are defined in the By-Laws and Rules of

Fair Practice shall, unless the context otherwise requires, have the

meaning as defined therein.

Associated Person

A person associated with a member or any other broker/dealer, as

defined in Article I, paragraph (m) of the NASD's By-Laws, shall not

include a person whose association with the member is limited to a

passive ownership interest in the member of ten percent or less, and

who does not receive hot issues from the member in which he or she has

the ownership interest; and that such member is not in a position to

direct hot issues to such person.

Public Offering

The term public offering shall mean any primary or secondary

distribution of securities made pursuant to a registration statement or

offering circular including exchange offers, rights offerings,

offerings made pursuant to a merger or acquisition, straight debt

offerings and all other securities distributions of any kind whatsoever

except any offering made pursuant to an exemption under Section 4(1),

4(2) or 4(6) of the Securities Act of 1933, as amended, or pursuant to

Rule 504 (unless considered a public offering in the states where

offered), Rule 505 or Rule 506 adopted under the Securities Act of

1933, as amended [all distributions of securities whether underwritten

or not; whether registered, unregistered or exempt from registration

under the Securities Act of 1933, and whether they are primary or

secondary distributions, including intrastate distributions and

Regulation A issues, which shall at an immediate premium, in the

secondary market]. It shall not mean exempted securities as defined in

Section 3(a)(12) of the Securities Exchange Act of 1934.

Immediate Family

The term immediate family shall include parents, mother-in-law or

father-in-law, husband or wife, brother or sister, brother-in-law or

sister-in-law, son-in-law or daughter-in-law, and children. In

addition, the term shall include any other person who is supported,

directly or indirectly, to a material extent by the member, person

associated with the member or other person specified in paragraph[s]

(2)[, (3), or (4)] above.

Normal Investment Practice

Normal investment practice shall mean the history of investment of

a restricted person in an account or accounts maintained by the

restricted person. [maintained with the member making the allocation.

In cases where an account was previously maintained with another

member, but serviced by the same registered representative as the one

currently servicing the account for the member making the allocation,

such earlier investment activity may be included in the restricted

person's investment history.]

* * * * *

Disproportionate

In respect to the determination of what constitutes a

disproportionate allocation, the Association uses a guideline of 10% of

the member's participation in the issue, however acquired.

* * * * *

Insubstantiality

* * * * *

Sales By Issuers in Conversion Offerings

Definitions

* * * * *

Conditions for Exemption

(b) * * *

Sales to Members, Associated Persons of Members and Certain Related

Persons

(1) If the purchaser is a member, person associated with a member,

member of the immediate family of any such person to whose support such

person contributes, directly or indirectly, or an account in which a

member or person associated with a member has a beneficial interest:

(A) the purchaser shall be an eligible purchaser;

(B) the securities purchased shall be restricted from sale or

transfer for a period of [150 days] three months following the

conclusion of the offering; and

(C) the fact of purchase shall be reported in writing to the member

where the person is associated within one day of payment.

Sales to Other Restricted Persons

(2) If the purchaser is not a person specified in Subsection (b)(1)

above, and is [the purchaser shall be] an eligible purchaser pursuant

to Subsection (a)(2), the conditions of Subsection (b)(1) shall not

apply to such purchaser.

* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the 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 are set forth in Sections (A), (B), and (C)

below.

(A) Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

(i) Purpose of the Proposed Rule Change

(a) Overview of Free-Riding and Withholding Interpretation. The

purpose of the Interpretation is to protect the integrity of the public

offering system by ensuring that members make a bona fide public

distribution of ``hot issue'' securities and do not withhold such

securities for their own benefit or use the securities to reward other

persons who are in a position to direct future business to the member.

Hot issues are defined by the Interpretation as securities of a public

offering while trade at a premium in the secondary market whenever such

trading commences. The Interpretation prohibits members from retaining

the securities of hot issues in their own accounts and prohibits

members from using sales of such securities to directors, officers,

employees and associated persons of members and other broker/dealers.

It also restricts member sales of ``hot issue'' securities to the

accounts of specified categories of persons, including among others,

senior officers of banks, insurance companies, registered investment

companies, registered investment advisory firms and other persons

within such organizations whose activities influence or include the

buying or selling of securities. These basic prohibitions and

restrictions are also made applicable to sales by members of hot issue

securities to accounts in which any such persons may have a beneficial

interest and, with limited exceptions, to members of the immediate

family of those persons restricted by the Interpretation.

(b) Rule proposal background. At its May 1992 meeting, the Board of

Governors appointed a special committee (the ``Committee'') to examine

the Interpretation to determine if the Interpretation's restrictions,

definitions and obligations are relevant in today's securities markets.

The Committee was comprised of representatives of the Association's

National Business Conduct, Corporate Financing and Insurance Affiliated

Members Committees as well as members of the NASD Board of Governors.

The Board also asked the Committee to examine various interpretative

issues that had been raised with the NASD. The Committee met numerous

times from May 1992 until April 1993 and received input and

suggestions, both in writing and in person, from members, issuers, law

firms, the NASD's Legal Advisory Board, and the staff of various NASD

departments.

In June 1993, the NASD published for comment proposed modifications

to the Interpretation based on its review and suggestions received. The

NASD received 36 comment letters on the proposed modifications. The

Committee considered the comments and made final recommendations to the

National Business Conduct Committee (``NBCC'') in November 1993. The

Board considered and approved the NBCC's recommendations on November

14, 1993.

The proposed rule change includes language clarifications to

facilitate understanding of the Interpretation's application, as well

as substantive modifications. The following discusses the substantive

modifications proposed.

(c) Substantive proposed modifications. The NASD is proposing

several substantive modifications to the Interpretation, including

changes in connection with limited business broker/dealers, investment

partnerships and corporations, stand-by arrangements, venture capital

investors, securities offerings covered by the Interpretation, and

issuer-directed securities. The NASD believes that the proposed

substantive changes clarify the scope of the Interpretation and remedy

certain unintended effects the Interpretation has had in its present

form. Specifically, the NASD believes that the Interpretation has

prohibited transactions which do not implicate the Interpretation's

objective of a bona fide distribution of hot issue securities to the

public, and may have created unduly burdensome restrictions and expense

for NASD members and their customers. Thus, the NASD believes that the

proposed changes, described further below, appropriately restrict

prohibited persons from receiving hot issues without engendering

unintended restrictions inconsistent with the purpose of the

Interpretation.

1. Stand-by arrangements. If an offering begins trading at a

premium when the secondary market begins, the Interpretation's

restrictions are implicated and may affect the successful completion of

the offering by prohibiting the sale to stand-by purchasers, due to a

person restricted under the Interpretation having a beneficial interest

in the stand-by account. The NASD believes that securities purchased

pursuant to a stand-by arrangement (i.e., an agreement to purchase

securities not purchased during the offering period) by a restricted

account should not be subject to the Interpretation if the conditions

proposed are met. The NASD believes that the proposed conditions

(prospectus disclosure, a formal agreement, absence of any other

purchaser and a three month holding period) remedy any potential

derogation from the Interpretation that such a sale could cause, while

facilitating a bona fide distribution of the securities offered.\3\

\3\Of course, any resales by the stand-by purchasers would need

to be conducted in compliance with all applicable regulatory

requirements including prospectus delivery pursuant to Section 5 of

the Securities Act of 1933.

---------------------------------------------------------------------------

2. Definition of immediate family. The Interpretation presently

restricts immediate family members of persons enumerated in Paragraph 2

(persons associated with broker/dealers), and Paragraphs 3 and 4 of the

Interpretation (persons having a connection to the offering and

individuals related to banks, insurance companies and other

institutional type accounts) from participating in hot issue

distributions. The Interpretation defines immediate family members very

broadly and includes such persons as father-, mother-, brother- and

sister-in-law. An immediate family member of a person associated with a

broker/dealer is prohibited from purchasing hot issues to the same

degree as the associated person, unless it can be demonstrated that the

associated person does not contribute directly or indirectly to the

support of the immediate family member. In the latter circumstance, the

immediate family member of the associated person may purchase a hot

issue under the same conditions as those persons restricted pursuant to

Paragraphs 3 and 4 of the Interpretation. Specifically, such persons

may purchase hot issues if: (1) The securities were sold to such

persons in accordance with their normal investment practice with the

member making the distribution; and (2) the securities sold are

insubstantial and not disproportionate in amount as compared to sales

to members of the public and that the amount sold to any one such

person is insubstantial.

The NASD believes that in its present form, the immediate family

member provisions often place inequitable restrictions on a person with

a fairly attenuated connection to a restricted person named in the

Interpretation (e.g., the sister-in-law of a bank vice-president), and

often result in unduly burdensome compliance difficulties for members

monitoring whether such persons are restricted or become restricted.

The NASD believes that the proposed modifications to the immediate

family member provisions will ensure that those persons with a

substantial nexus to a restricted person will be similarly restricted

under the Interpretation, provide a clearer test for NASD members in

determining whether such persons are restricted, and eliminate the

Interpretation's application to persons not intended to be restricted.

The proposed modifications would:

(a) retain the investment history exemption, and expand it to

include the use of investment history at firms other than the member

making the allocation. The burden of obtaining such information would

remain with the firm making the sale;

(b) eliminate the immediate family restrictions on persons other

than those associated with broker/dealers (categories 3 and 4

referenced above) and the Interpretation would only apply to the

enumerated individuals in those categories and to persons who are

supported directly or indirectly to a material extent by the restricted

person;

(c) with respect to persons associated with broker/dealers,

continue to apply the immediate family restrictions to persons

supported by the restricted individual and to allocations by the

restricted individual's firm, but would no longer prohibit sales to

non-supported family members of a person associated with a broker/

dealer by a broker/dealer that does not employ the restricted person,

where the restricted person has no ability to control the allocation of

the hot issue.

There would continue to be a violation if it could be determined

that the restricted person has a beneficial interest in the account to

which an allocation was made.

3. Venture capital investors. The NASD believes that bona fide

venture capital investors should be allowed to purchase a hot issue to

maintain their percentage ownership in an entity, notwithstanding that

the venture capital investor may be a restricted person, or that such

person may have a beneficial interest in the venture capital account.

The NASD notes that the venture capital investor often plays a pivotal

role in the continued viability of an entity prior to its public

offering, and that such an investor should be allowed to maintain his

or her own ownership interest after the entity completes its public

offering.

The venture capital investor, in order to purchase the hot issue

without implicating the Interpretation's restrictions, would have to

meet the following conditions:

(a) one year of preexisting ownership in the entity;

(b) no increase in the investor's percentage ownership above that

held for the three months prior to the filing of a registration

statement in connection with the initial public offering;

(c) a lack of special terms in connection with the purchase; and

(d) the venture capital investor shall not assign, sell, pledge,

hypothecate or otherwise dispose of the securities for a period of

three months following the effective date of the registration statement

in connection with the offering.

The NASD believes that the conditions imposed on the venture

capital investor ensure that the securities may be purchased by a bona

fide venture capital investor who has had an on-going interest in an

entity, and protect against any attempt to circumvent the

Interpretation's restrictions by investing in an entity shortly before

its public offering.

4. Investment partnerships and corporations. The Interpretation,

under ``Investment Partnerships and Corporations,'' generally disallows

sales of a hot issue to an investment partnership or corporation, or

similar account (``investment partnership'') if a restricted person has

a beneficial interest in the entity. Thus, an investment partnership

with several limited partners would be ``tainted'' due to the limited

partnership interest of the restricted person. In August 1992 and

October 1993 Notices to Members, the NASD announced it was going to

allow investment partnerships, on an interim basis, to use a ``carve

out'' mechanism to prevent restricted persons with an interest in an

investment partnership from participating in hot issue allocations.

This ``carve out'' mechanism requires the NASD member making such

allocation to set up a separate account for these transactions and

obtain from the investment partnership and its accountants

documentation that indicates that the restricted persons are prevented

from participating in a hot issue allocation.

The NASD believes that the carve-out methodology is the most

equitable and appropriate approach for investment partnerships in which

restricted persons have a beneficial interest, and that the carve-out

procedure should be codified as proposed under the Beneficial Interest

section of the Interpretation. The carve-out procedure would not allow

a person restricted under the Interpretation to receive a hot issue

allocation inconsistent with the Interpretation's provisions; but would

also not inequitably penalize those not restricted under the

Interpretation due to their interest in an investment partnership in

which a restricted person also has an interest. A typical scenario is

where a limited partnership with a large number of limited partners is

restricted under the Interpretation because one of the limited partners

is an officer of an insurance company, and therefore restricted under

Paragraph 4 of the Interpretation. Rather than restricting the whole

limited partnership, the carve-out procedure would allow the limited

partnership to purchase the hot issue by properly allocating the hot

issue away from the restricted limited partner according to the

specified requirements proposed.

In addition, the NASD believes that a beneficial interest, as

defined under the Interpretation, should not be created by the receipt

of a management fee based on the performance of an account. The NASD

believes that investment partnerships and other similar accounts

typically require that the management fee structure of such accounts

include a performance-based component. Thus, an investment advisor

restricted under Paragraph 4 of the Interpretation could restrict an

entire investment partnership, in which no restricted persons have an

interest, based solely on the investment advisor receiving a fee based

on the performance of the securities in the investment partnership

account. The Beneficial Interest provision of the Interpretation is

intended to address those accounts in which a restricted person has a

substantive, albeit not necessarily direct ownership, interest that

should be appropriately restricted. The NASD believes that the receipt

of a performance-based fee, without the existence of any other

beneficial interest, should not create such an interest.

5. Definition of public offering. In its present form, the

Interpretation's definition of a public offering includes virtually any

and all distributions of securities, whether registered or unregistered

under the Securities Act. The NASD has found that the definition has

had the unintended effect of implicating the Interpretation's

restrictions for bona fide private placements of securities which do

not present the potential abuses that the Interpretation is intended to

guard against. The NASD believes that the proposed modification to the

definition, which in essence does not apply the Interpretation to a

traditional private placement of securities, is appropriate because

such distributions generally are limited in scope and have holding

periods placed on the privately placed securities. Thus, the NASD

believes that such placements should not be within the purview of the

Interpretation in that distribution is limited and that the potential

for restricted persons to purchase the securities and resell or

``flip'' them in a short period of time is limited due to the resale

restrictions placed on such offerings.

6. Associated person definition. Article I, Section (m) of the NASD

By-Laws defines a ``person associated with a member'' to include a

partner of a broker/dealer and any person who is directly or indirectly

controlling or controlled by such member, whether or not such person is

registered with the Association. The NASD has found that a certain

degree of confusion exists as to the status of passive investors in

broker/dealers, such as broker/dealer limited partners, equity owners,

or subordinated lenders.

The NASD believes, that under certain circumstances, such persons

should not be considered persons associated with a broker/dealer due to

their limited, passive investment in a broker/dealer. Thus, the NASD

has proposed that if a person owns or has contributed 10% or less to a

broker/dealer's capital, such person should not be construed to be an

associated person; provided that, such ownership interest is a passive

investment, the person does not receive hot issues from the member in

which she has the interest, and that the broker/dealer is not in a

position to direct hot issues to the person. The NASD believes that the

limitations placed on such persons in order not to be considered

associated persons will prevent the same from attempting to use their

ownership interests in a broker/dealer to effect the purchase of hot

issues, and circumvent the Interpretation's objective of a bona fide

distribution of a hot issue.

7. Persons associated with limited business broker/dealers. Similar

to the status of persons with a limited ownership interest in a broker/

dealer, the NASD believes that persons associated with certain broker/

dealers that transact a limited securities business should also not be

restricted as other associated persons under Paragraph 2 of the

Interpretation. Specifically, the NASD proposes that persons associated

with broker/dealers whose business is limited to direct participation

programs or investment company/variable product securities not be

restricted under the Interpretation to the same extent as those persons

associated with broker/dealers with a more comprehensive securities

business.

Typically, a broker/dealer's business is limited pursuant to a

restrictive agreement executed by the member as a condition to its

membership in the Association. In that persons associated with such

limited broker/dealers are not in a position to sell, distribute, or

withhold hot issue securities, the NASD does not believe that such

persons would be in a position to inhibit a bona fide distribution of a

hot issue security. The NASD notes that the proposed modification

applies only to a person associated with such a limited broker/dealer,

and not to the broker/dealer itself. The NASD does not believe that it

is appropriate for any NASD member to purchase a hot issue security for

its own account, regardless of the extent of its securities business.

8. Issuer directed securities. Presently, an employee of an issuer,

who also is restricted under the Interpretation, must receive

permission from the NASD Board of Governors in order to purchase hot

issue securities of its employer, if the employee does not have the

requisite investment history with the NASD member making the securities

distribution. For example, an employee of a manufacturing company who

is married to the senior officer of a bank would be restricted under

the Interpretation because he or she is the immediate family member of

a restricted person under Paragraph 3 of the Interpretation. Under the

proposed changes to Paragraph 3 of the Interpretation, the employee

would still be restricted if the senior officer of the bank directly or

indirectly supports the employee. If permission is granted by the board

of governors, the employee is allowed to purchase the securities of the

employer without meeting the investment history requirement, but the

amount purchased would still have to meet the insubstantial and not

disproportionate tests described above.

The NASD believes that it is inequitable to impose such

restrictions on employees of issuers who are in most cases tangentially

restricted under the Interpretation, in connection with their purchase

of securities issued by their employer. The NASD notes that issuer-

directed share programs are viewed as a valuable tool in employee

development and retention, and does not believe that the objectives of

the Interpretation are furthered by imposing essentially the same

restrictions on such purchases as those not involving an employer/

employee relationship. Thus, the proposed modifications to the Issuer

Directed Securities section of the Interpretation will allow employees

of issuers to purchase hot issue securities of the employer under the

same terms and conditions as persons associated with NASD members are

permitted in connection with purchases of securities issued by the

member, pursuant to an exemption provided in Section 13 of Schedule E

to the NASD's By-Laws.

9. Cancellation safe harbor. The NASD believes that it is

appropriate to clarify in the Interpretation that it will not be a

violation if a NASD member makes an allocation of a hot issue to a

restricted person or account, so long as the member cancelled the trade

and reallocated the security at the public offering price to an

unrestricted account, prior to T+1 of the initial transaction. The NASD

believes that the clarification will remedy any concerns caused by

inadvertent violations of the Interpretation that are corrected by the

NASD member making the distribution. Sales following cancellation would

need to be made in compliance with applicable laws, including section 5

of the Securities Act.

(ii) Statutory Basis For Proposed Rule Change

The NASD believes that the proposed rule change is consistent with

the provisions of Section 15A(b)(6) of the Act in that the proposed

changes to the Interpretation will promote just and equitable

principles of trade by facilitating the bona fide distribution of hot

issue securities to the public, and protect against the receipt of hot

issues by persons restricted under the Interpretation. Further, the

NASD believes that the proposed changes and clarifications to the

Interpretation are consistent with Section 15A(b)(9) in that they

alleviate certain inequities caused by the Interpretation, which

imposed burdens on competition not necessary or appropriate in

furtherance of the purposes of the Act.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The 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, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the

Proposed Rule Change Received From Members, Participants, or Others

The Association received 36 letters commenting on Notice To Members

93-40 (the ``Notice''), the proposed amendments to the Interpretation.

The commenters include the American Bar Association, the Securities

Industry Association, twelve law firms, nine investment advisers/asset

managers, seven broker/dealers, three insurance companies, two

associations, and one CPA firm. Below is a summary of the more

significant and/or recurring issues raised in the letters and the

NASD's position in connection with the same. The topics addressed

follow the order in which they were presented in the Notice, beginning

at page 258. Following that discussion are topics not included in the

Notice, but raised in the comment letters.

Securities to be Covered

With regard to the solicitation of comments on debt securities,

those who did comment recommended that rated debt securities,

especially corporate debt securities, be excluded from the

Interpretation. The commenters maintained, in general, that the pricing

of such securities is made in conjunction with a comparison to U.S.

Treasury securities, that their price fluctuates relative to interest

rates, and that such securities are typically considered fungible by

investors, i.e., investors look for a certain grade of debt, and do not

focus on the issuer, as in equity offerings. Thus, they maintained that

the abuses that the Interpretation seeks to prevent are not evident in

rated debt offerings, and that the Interpretation's methodology is

inapplicable to the trading of such securities.

The NASD has considered that it does not typically bring

enforcement actions in this area, but has concluded that the continued

coverage of debt securities is warranted for purposes of deterring any

potential future problems in this area.

Stand-by Arrangements

Those who commented generally supported the proposal. One commenter

maintained that the five-month holding period was too long in that it

went beyond the period in which the purchaser should be exposed to the

market risk for the securities. It proposed a holding period of no

longer than three months, which it maintains is adequate time for the

market to establish some equilibrium for the security. Another

commenter believed that it is unclear to whom an underwriter has to

represent that it was unable to find any other purchaser for the

securities, and suggested that a representation in the prospectus

should suffice.

The NASD believes that the various holding periods under the

Interpretation and in the Free-Riding provisions of Schedule E to the

By-Laws dealing with offerings by members of their own securities

should be uniform and has therefore proposed a three month holding

period.

Cancellation of Trades as ``Safe Harbor''

One commenter believed that there would not be any implications

under SEC Rule 10b-6 for the proposed safe harbor so long as the

cancellation and reallocation was completed before settlement date. A

different commenter suggested that any concerns with Rule 10b-6 could

be remedied by obtaining a no-action letter from the SEC. Another

commenter suggested that any notice of cancellations and reallocations

would have to be given to the restricted purchaser no later than the

day after purchase, and a further commenter maintained that the

proposal was too reactive. It suggested that the NASD establish a

procedure where hot issues were characterized as such before the

distribution via indications of interest, so as to prevent sales to

restricted accounts.

The NASD notes that for purposes of Rule 10b-6, a distribution

includes ``the entire process by which in the course of a public

offering the block of securities is dispensed and ultimately comes to

rest in the hands of the investing public.''\4\ Thus, a distribution

continues if a broker-dealer withholds any part of an offering in

proprietary or nominee accounts and later sells those securities to the

public after secondary trading has begun.\5\ Moreover, a cancellation

of a bona fide purchase order will not reopen the distribution where

there is no reason for the underwriter to believe that the purchase

order would be cancelled.\6\ Whether a particular cancellation and

reallocation for purposes of compliance with the Interpretation will

raise an issue under Rule 10b-6 will depend upon the facts and

circumstances involved in that cancellation and reallocation.

\4\R. A. Holman & Co. v. SEC, 366 F.2d 446, 449 (2d Cir. 1966),

modified on other grounds, 377 F.2d 665 (2d Cir. 1966), cert.

denied, 389 U.S. 991 (1967).

\5\Wall Street West, Inc., 47 S.E.C. 1003, 1005 (1984).

\6\Id.

---------------------------------------------------------------------------

Immediate Family

Those who commented strongly supported the lifting of the immediate

family restrictions on persons restricted under Paragraphs three and

four of the Interpretation. One commenter expressed concern that the

retention of the immediate family restriction in connection with

allocations by the broker/dealer that employs the restricted person (as

opposed to allocations by broker/dealers that do not employ the

restricted person) creates a new category of restricted persons that

may prove burdensome for the member who is making the distribution.

The NASD does not believe that any new restricted category is being

created and believes that the proposed modifications are appropriate.

Persons With Limited Registration or Limited Purpose Broker/Dealers

Several of the commenters supported the proposed exemption as

described in the Notice. In addition, virtually all proposed that the

exemption be expanded to apply to all persons, notwithstanding their

level of registration, if they are associated with broker/dealers that

do a limited business. They maintained generally that such

representatives are proscribed from doing any securities business which

is beyond the scope of the limited broker/dealer's prescribed business

(e.g., investment company securities), and maintained that the

potential for abuse by one that has a general license is unlikely. Some

of the commenters contended that limited broker/dealer representatives

often have a Series 7 (general securities representative) license in

order to comply with state law, and one commenter maintained that the

exemption as proposed would create a disincentive for persons with

limited registrations from seeking further registration/education.

Various commenters believed that a firm-based exemption should include

the firms listed in the Notice as well as firms that do not underwrite

or distribute initial public offerings, merger and acquisition boutique

firms that do not trade, and private placement firms.

The NASD does not believe that it is appropriate for any NASD

member to purchase a ``hot issue'' for its own account and that the

categories of exemption should not be expanded to include member firms

or expanding the categories to be exempted. The NASD, however, agrees

with the suggestion of several commentators that this exemption be

expanded to cover all persons associated with direct participation

program or investment company/variable product broker/dealers

regardless of their registration status. The Association has considered

that the NASD's Membership Committee encourages members to qualify

their registered persons through Series 7 even if they are going to do

limited activities and that these individuals should not be penalized

for holding such licenses.

Investment Partnerships and Corporations

There were several comments on the proposed changes, and opposition

to applying the Interpretation to investment partnerships and

corporations in general. First, all those who commented on substituting

a certified public account's certification in lieu of an attorney

opinion letter, including the American Institute of Certified Public

Accountants (``AICPA''), maintained that the certification would not

work because the certification is more legal than factual, and because

the analysis for certification would not comply with the ``Attestation

Standards'' necessary for a CPA to render such a certification.

Notwithstanding the proposed amendments, several of the Commenters

had general policy concerns with investment partnerships and

corporations. Most believed that the Interpretation should not apply to

partnerships because: (1) partnerships typically represent interests of

individual investors, thus the objectives of a bona fide distribution

are furthered by distribution to partnerships; and (2) the

Interpretation unfairly discriminates between mutual fund type accounts

and partnerships because of size, maintaining that there is no need for

delineation because most limited partners have no control over the

purchase and sale of securities for the account and do not exercise any

discretion. One commenter maintained that precedent for such a position

could be found in rules and interpretations under Sec. 16 of the

Exchange Act, which does not require officers to disgorge profits

resulting from transactions through investment partnerships.

Further, most maintained that receipt of performance-based fees

alone should not restrict an account, maintaining that partnership law

typically requires that a general partner/manager maintain some de

minimis equity position in the partnership. In addition, one commenter

believed that the responsibility for opening up a separate hot issue

account should rest with the member. Several of the commenters

suggested various de minimis provisions which would allow the

participation by investment partnerships in hot issues, notwithstanding

the presence of a restricted person(s).

The NASD has considered the comment of the AICPA that accountants

cannot provide the certification proposed in the Notice and therefore

has proposed that a written representation of an accountant or counsel

be substituted for the accountant's certification. This written

representation would replace the existing ``opinion of counsel'' under

paragraph B of the Investment Partnerships and Corporations section of

the Interpretation. The NASD believes that the proposed ``written

representation'' satisfies the Association's objective of ensuring that

Members seek the counsel of an independent, qualified third party in

meeting their obligations under the Interpretation, while not imposing

any requirements that are unduly burdensome or unnecessarily

problematic.

The NASD has also considered various comments that indicate that

more trustees and institutional investors are demanding that

performance-based fees be charged rather than asset based fees for

money management services and therefore has proposed that performance-

based fees be deleted from the definition of beneficial interest under

the Interpretation.

In response to other comments, the NASD believes that securities

placed into a carved out ``hot issue'' account should remain in that

account until sold. The Association does not believe that such

securities should be subject to ``journaling'' to the regular account

after a specified time period in that such a procedure would be

difficult to monitor.

Foreign Mutual Funds

The Board of Governors solicited comment as to exempting foreign

mutual funds from the Investment Partnerships and Corporations section

of the Interpretation, similar to the exemption provided for sales to

investment companies registered under the Investment Company Act of

1940. One commenter suggested that the exemption apply only to foreign

investment companies which are subject to regulation under foreign laws

expressly designed for investment companies and/or satisfy minimum

standards that the NASD would establish. Another commenter expressed

disappointment that the Notice did not address the application of the

Interpretation to foreign broker/dealers in general.

The NASD is concerned as to whether the Association can adequately

determine whether a foreign country's mutual fund regulation is similar

to our own. The NASD has concluded, therefore, that no provisions

should be adopted at this time. If, however, the NASD can develop a

substantial equivalence standard, the issue could be revisited.

Venture Capital Investors

Those who commenter generally supported the exemption, and proposed

certain revisions. One commenter maintained that allowing the venture

capital investor to purchase only up to his percentage ownership for

the prior year was too limiting in that a venture capitalist could make

a crucial contribution after the one year mark, well before the issuer

goes public, and should be able to recover that contribution in stock.

Another commenter believed that the requirement that no special terms

be received by the purchasers should be qualified to limit that to

``special terms from the member'' because a venture capitalist

typically enters into special arrangements with the issuer which could

be construed as prohibited special terms.

The NASD believes it is an appropriate requirement that a venture

capital investor have an ownership interest in the entity for at least

one year prior to the offering; however, in response to the comments,

the NASD believes that it is appropriate to use three months before the

date that the registration statement is filed as the date to be used

for calculating the investors' existing ownership interest. The NASD,

in keeping with its prior recommendation, believes that a three month

holding period for the securities received in the distribution is

appropriate.

Issues Not Addressed in the Notice

Ownership Interests in a Broker/Dealer

Several commentators asked for advice on when passive investors who

are limited partners, equity owners or subordinated lenders of a

broker/dealer would be construed as associated persons under the

Interpretation. In other words, what ownership or contribution

percentage would trigger associated person status.

The NASD believes that if the person owns or has contributed 10% or

less to the firm's capital, does not receive hot issues from the member

in which he has the interest, and that member is not in a position to

direct hot issues to the investor, then the NASD should not construe

the investor to be an associated person solely by virtue of the

investment in the broker/dealer.

Category 4 Restricted Persons

Several commentators asked whether managers/advisors of hedge

funds, investment partnerships or of other similar entities would be

construed as a restricted person under Paragraph four of the

Interpretation (sales to the senior officer of a bank, investment

company or other institutional type account).

The NASD believes that managers of investment partnerships or

corporations, hedge funds, and other similar accounts are clearly

involved with the buying or selling of securities for an institutional

type account and, as such, are restricted under Paragraph four of the

Interpretation.

Private Placements

Several commentators sought advice on how the Interpretation should

be applied to members who receive securities of an issuer in a private

placement. The definition of ``public offering'' as currently set forth

in the Interpretation is comprehensive. The definition includes all

distributions ``* * * of securities whether underwritten or not;

whether registered, unregistered or exempt from registration under the

Securities Act of 1933, and whether they are primary or secondary

distributions, including intrastate distributions and Regulation A

issues, which sell at an immediate premium, in the secondary market.''

As such, the definition by its terms covers these private placements.

Such distributions may involve securities which are either registered

or unregistered.

The NASD believes that the definition of public offering is

unnecessarily broad and does not believe that the Interpretation should

cover traditional ``private placements'' of unregistered securities.

Thus, the NASD has proposed a definition of a public offering

consistent with the definition provided in Schedule E to the

Association's By-Laws.

Issuer Directed Exemption

Several commentators requested that employees of an issuer or the

issuer's parent who are restricted persons be exempt from the

Interpretation when purchasing shares of their employer or its parent.

Currently, such exemptions can only be granted on a case-by-case basis

by the NASD Board of Governors.

The NASD agrees that the issuer directed share exemption should be

modified to allow restricted employees to purchase under the same terms

and conditions as employees of member firms do under Schedule E of the

By-Laws, thereby eliminating the need for applications to the NASD.

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. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

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

5 U.S.C. 552, will be available for inspection and copying in the

Commission's Public Reference Room. Copies of such filing will also be

available for inspection and copying at the principal office of the

NASD. All submissions should refer to the file number in the caption

above and should be submitted by [insert date 21 days from the date of

publication].

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority, 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-19444 Filed 8-9-94; 8:45 am]

BILLING CODE 8010-01-M